Making Cement a Household Word

Trucks scour neighborhoods for customers. Deliveries are promised to arrive within 20 minutes, like pizzas. The logo is emblazoned on everything from museum exhibitions to soccer jerseys.

The product? Cement.

Indeed, the Mexican cement giant called Cemex has managed to turn its heavy bags of gray powder into a brand-name consumer product throughout the Third World--not the bland industrial commodity it is in the United States and other developed countries.

Cemex’s skill in making cement as customer-friendly as beer or cereal largely explains why it has grown into the world’s third-biggest cement company and Mexico’s most multinational corporation, listed on the New York Stock Exchange since September.

A recent global survey of chief executives by the Financial Times and PricewaterhouseCoopers ranked Cemex the most admired firm in Latin America and one of the five most respected construction-related companies in the world.

To be sure, Cemex also has invested in leading-edge plant technology and information systems, helping it succeed in sophisticated First World markets such as Southern California and Spain.

But Cemex executives see their key advantage as understanding emerging-market customers from Egypt to the Philippines--clients who often take home their cement piled on wheelbarrows or bicycles rather than by the truckload.

On the outskirts of the industrial city of Toluca, schoolteacher Maria Felix Teran was buying cement one recent day from a dark one-room storefront piled high with Cemex sacks. For the second year in a row, Felix Teran, 38, was using her Christmas bonus to buy cement to finish her small house.

“We’ve been building bit by bit, and now comes the best part--to close in the roof,” Felix Teran said. “We could only afford to do this with our Christmas bonus.”

Few people understand such customers as well as Lorenzo Zambrano, the 55-year-old chairman and chief executive of Cemex. He is the grandson of the company’s founder, and Mexico’s second-wealthiest man (after telecommunications and industrial magnate Carlos Slim).

“Cement is the stuff of dreams in many of our countries,” Zambrano said in an interview in his office at the company’s headquarters in the northern city of Monterrey.

“People dream of having a solid cement house. They dream of having highways, hospitals and schools,” he added. “These things are taken for granted in [the United States], but in many countries they still haven’t arrived, and people dream about it.”

CEO Started in Basement

Zambrano might as well have cement flowing through his veins. He’s never done anything else. When he was 14 and his father died, Zambrano recalls, he told an uncle he would one day run Cemex. He paid his dues as factory manager in the desert city of Torreon, where his view from a basement office was of workers’ feet trudging past the one tiny window, and later as the company’s operations manager.

Zambrano, described by Forbes magazine in 1998 as one of the world’s 10 smartest entrepreneur-billionaires, became chief executive of Cemex in 1985. As Mexico’s economy opened to competition in the late 1980s, he resolved to sell off the company’s other holdings and focus totally on cement. And he set the company on a global expansion drive: “Either we grew or we’d be swallowed up and die as an independent company.”

So Cemex grew, grabbing up cement makers in Venezuela, Colombia, Indonesia, the Philippines, Egypt and other countries, most of them Third World. It also bought two stagnant cement companies in Spain and turned them around. The company now has operations in 23 countries.

Zambrano’s geographic diversification proved adept; it allowed Cemex to weather the 1995 peso crisis when Mexican sales plummeted and other Mexican firms crashed. Mexico now accounts for just 44.6% of Cemex sales.

Cemex executives have scoffed at rumors that the firm might try to buy Britain’s Blue Circle Cement Group, the world’s fifth-largest player. But no one expects Zambrano’s buying spree to stop soon.

It’s a good time to be in the cement business. World consumption grew steadily in the ‘90s and, despite the Asian economic crisis, exceeded 1.5 billion tons in 1998. And Cemex executives are confident there is no substitute product in sight.

The fine powder that is mixed with water and sand to bind into concrete was patented by British bricklayer Joseph Aspdin in 1824. It is now is the world’s most widely used building material, says the Portland Cement Assn. of Skokie, Ill.

With the world’s economy generally robust and construction surging, the entire cement industry has flourished. Ahead of Cemex are world leader Holderbank, based in Switzerland, and No. 2 LaFarge of France, which has extensive U.S. operations.

Thomas Edison was a pioneer of the U.S. industry, improving the rotary kiln used to mix and burn calcium, silicon, iron and aluminum into cement. The U.S. industry has since become fragmented and foreign-dominated: 50 companies operate 118 cement factories. Foreign companies including Cemex own about 65% of U.S. cement capacity, triple the penetration of 1980.

But Cemex’s major competitors are heavily focused on mature markets, which is fine with the Mexicans; 80% of Cemex’s business is in emerging countries.

“Mexico has just one-third of the highways that it should have, and the difference is even greater in our ports,” says Hector Medina, the vice president for planning and finance. “And this is the same in the Philippines, in Egypt, in Indonesia, in Venezuela, in all of our markets. . . . We believe in the character of cement as a consumer product.”

Beyond its aggressive expansion and an obsession with efficient manufacturing, Cemex focuses on customer service in ways that would do justice to a soft-drink company.

Sales Incentives for Distributors

It pays lavish attention to its distributors--5,000 in Mexico alone--who can earn points toward rewards for hitting sales targets; some can earn Cemex stock. High-volume independent distributors can buy trucks and other supplies through Cemex at significant discounts.

“Cemex supports us in every aspect,” said Arturo Henkel, a distributor based in Toluca. “I have taken a course with them on cement and how to be a competitive distributor. And those strategies are reflected in our promotion campaigns and our sales results.”

Cemex goes even further--to customers themselves and the three- or four-man building crews who often make the purchase choice for the clients.

Last year, Cemex put on a marketing drive aimed at those builders: Cemex vans drove around neighborhoods looking for home-building sites. If Cemex products were being used, the crews could win soccer balls, caps and T-shirts. Crews using competitors’ products often told the promoters to come back the next day--by which time they had switched to Cemex.

Another recent program in Toluca shows similar instincts for capitalizing on the way cement is part of the culture: When the roof is finished at a building site, the workers and neighbors celebrate with a meal. Toluca sales executive Jose Alejandro Romero said Cemex provides the food--if the builder agrees to put up a sign with a Cemex logo announcing the party.

Cemex also knows that tens of thousands of immigrants to the U.S. go home at holiday time each year with cash in their pockets to build or expand their houses. So Cemex hands out construction tip booklets at airports in migrant cities such as Zacatecas and Morelia, where charter flights pour in each December.

“The person who opens the cement bag is the one to whom the brand matters,” says Elias Revah Modiano, the company’s Central Mexico regional commercial director.

Yet another initiative: T-shirts with Cemex’s central Mexican brand, called Cemento Tolteca, are even adorned with images of the Virgin of Guadalupe for pilgrims who travel to the Basilica of Guadalupe in Mexico City each Dec. 12.

North American operations chief Francisco Garza said such tactics are vital in developing countries where most cement--87% in Mexico--is sold in bags rather than in bulk to concrete-mixing companies. In the U.S., the ratio is reversed: few customers buy cement in bags or ask for it by brand name.

The company also committed itself in 1998 to develop two new products annually. The two for this year will account for 14% of concrete sales in Mexico. One is a fluid filler for covering potholes. Another is an antibacterial cement ideal for use in chicken coop floors or water tanks.

Despite its low debt, a fivefold increase in revenue and 25% annual earnings growth during the 1990s, Cemex hasn’t fully won investors’ respect yet. The stock’s price-to-earnings ratio and other measures of Wall Street analysts’ confidence remain lower than in 1994, before Mexico’s crisis hit.

“They assign us the ratios of developing-country companies, even though we have very little volatility and our risk is limited due to our geographical diversification,” a frustrated Zambrano said. “They try to put us in a mold where we don’t belong.”

Roberto Guerra, director general of the Duff & Phelps credit rating agency in Mexico, agrees that any doubts about Cemex result from its substantial emerging-market presence, not its own operations.

“We have done comparisons of operating margins and net profit, and Cemex is ahead of all five major competitors,” Guerra said. “It is a First-World competitor.”

Aiming for Investors’ Respect

Cemex hopes its recent listing on the New York Stock Exchange will raise its visibility and show off its industry-leading operating margins and hefty cash flows. The stock doubled in 1999, though its rise has stalled in recent months. Cemex shares traded on the NYSE rose 63 cents to close at $26 on Friday.

Zambrano also says he hopes the company will earn an investment-grade rating on its debt by 2001. Cemex would be the first Mexican company to do so.

Another obstacle to growth may fall away soon: A U.S. cement-dumping penalty that slapped punitive tariffs against Cemex during the 1990s is due to be reviewed this year, and the competitor that brought the complaint has withdrawn it.

Even with the duty in force, Cemex has done well in Southwestern U.S. markets, supplying 20% of all imports into the United States and boosting sales by 23% in 1998 to $535 million. If that duty, now 46%, were to lapse, Cemex would become even more competitive.

Cemex already owns one U.S. cement plant in New Braunfels, Texas, as well as cement terminals and distribution operations in Southern California, Arizona and Texas.

Because cement is too heavy to ship economically, the huge multinationals tend to ship only short distances or buy up local operations.

Company Invests in Employees

Zambrano, who has an MBA from Stanford, also invests heavily in his employees to compete with the European giants.

Cemex pays for high-potential executives to study in the U.S., and dozens more are taking virtual MBAs or studying at the company’s in-house management program in Florida.

Analyst Carlos Perezalonso, who watches Cemex for ABN-AMRO Bank, says: “The people I know at Cemex wear the jersey very proudly. They rarely leave Cemex. There is a job bank for posts around the world, allowing people to move around. This is very motivating.”

Meanwhile, Zambrano himself is a techie--he confesses to having “more gadgets in my closet than I’d ever care to admit”--and his high-tech obsession permeates the company culture.

Its computers connect every Cemex manufacturing plant worldwide and knit together order and distribution systems. That allows deliveries to be pledged within 20 minutes, even in Mexico City’s chaotic traffic. If there are delays, customers receive discounts.

The network also lets Zambrano make his feared virtual inspections, via his IBM Thinkpad, of operations at Cemex factories anywhere in the world.

“It’s always useful to send a red flag to a plant manager in the Philippines and ask why you stopped your oven three times for the same reason,” Zambrano said with a smile. “It does get their attention.”

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Cementing Its Position

Cement maker Cemex has become Mexico’s most multinational and Latin America’s most admired company by expanding to the parts of the world that use the most cement.*

Cemex sales by the region:

Mexico: 44.6%

Spain: 19.6%

U.S.: 12.4%

Venezuela: 11.1%

Colombia: 6.3%

Caribbean: 4.8%

Panama: 1.2%

*Note: Figures exclude recently acquired Philippine, Indonesia and Egyptian operations

Cemex at a Glance

Employees: 24,000

Chief executive: Lorenzo Zambrano

Annual production capacity: 65 million tons

Operations: 50 cement plants in 23 countries (including 21 plants in Mexico and one in the United States)

*

Sales

(billions of dollars)

1998: $4.32 billion

Earnings

(millions of dollars)

1998: $803 million

Source: Cemex