International Business Cemex Is One

International Business Cemex is one of the world's largest cement companies, based out of Mexico. Cemex long held significant core competencies that made them one of the most efficient, effective operators in the industry. Moreover, their expertise in the developing world encouraged them to explore opportunities in other developing nations. Cemex embarked on an expansion strategy based mainly on acquisitions. Eventually these acquisitions included companies in the United States and Western Europe. Despite some pitfalls along the way, Cemex is now the world's #3 cement maker.

Given the failure of the Indonesia expansion plan, Cemex is faced with a decision regarding the future of its expansion strategy. The company needs to decide if its current program of acquiring underperforming foreign assets will serve it well as it expands into India and China. The main component of the problem is political risk and the management thereof. While previous expansions had been accepted by local government, protectionist interests in Indonesia had ultimately thwarted Cemex's attempts to gain control of Semen Gresik.

The company has traditionally viewed expansion in terms of its ability to apply its core competencies to the new company, with little regard to political risk. However, FDI is considered a threat to some governments. India, a traditionally socialist country since independence, and Communist China both have represented considerable political risk at one point or another in recent history. Cemex therefore needs to carefully consider its methods for evaluating political risk and gathering information on different potential stakeholders in the target country.

There are several alternatives for Cemex -- to abandon expansion plans; to re-focus expansion plans towards countries with less political risk; to develop better systems for evaluating political risk; or to ignore the Indonesian situation and continue as always. Abandoning plans seems foolish, on the basis of one failure. Refocusing the plans would give Cemex more time to digest the mistakes made in Indonesia while continuing their growth trajectory.

To develop new systems for evaluating political risk would be risky, but it may lead to better entry strategies such as joint ventures. Continuing as always may be preferred since it has generally been a success; however debacles such as Semen Gresik hurt earnings and should not be repeated if possible. It is recommended that Cemex develop better systems for evaluating political risk. Different governments have differing views on FDI. This means that the entry strategy should be tailored towards the situation in each country.

For a nation like Indonesia, acquisition was clearly not palatable, yet a joint venture or partnership may have allowed Cemex unopposed access to the market. This can be implemented by undertaking a study of how other firms, even in other industries, have entered a given market in the past. If a country has demonstrated a preference for certain forms of FDI, then those Cemex should have that knowledge. Thus, management needs to be proactive in terms of country and political reconnaissance, not just market and firm reconnaissance.

As an alternative choice, Cemex should refocus its expansion plans towards countries with less political risk. They have had tremendous success with overseas expansion thus far, and the main lesson from their bad Indonesian experience is that not every market has the same opportunities for FDI. If acquisition is what Cemex is proficient with, then they need to focus their energies not on the most attractive markets, but the most attractive markets that support acquisition. 1) Cemex is an acquisition specialist.

They perform best with FDI when they have control over the company and can make the changes they need to improve it. Cemex derives value from buying companies and improving them. This is the internalization theory. Cemex feels that the benefits from taking control are worth the expense.

They do not wish to risk technology transfer; they wish to have strict control over manufacturing and marketing, and they believe that with an undifferentiated product their competitive advantage is in their managerial expertise, something they do not wish to transfer to any foreign company. 2) To the host economy, Cemex brings a more efficient cement firm. They improve the construction business and its capacity. This in turn lowers the cost of construction and helps create jobs.

Potential drawbacks to Cemex's investment in an economy are that they teach competitors how to better perform. These competitors may be favored over the foreign Cemex by regulators. 3) The cement business requires a high investment in infrastructure. This includes not only the production facilities but the distributors as well, since the product is highly perishable. As a result, the infrastructure for a cement business is costly and time-consuming. It is also a relationship-oriented business, as demonstrated by the way in which Cemex builds its relationships with contractors in Mexico.

The company cannot expend the time and energy to build this infrastructure when investing overseas. Furthermore, many cement companies are inefficient, which means that Cemex can immediately add value to any acquisition. 4) Majority control is critical to Cemex because they need to be able to implement their systems and competencies in their acquisitions. The value they derive from their acquisitions relates directly to the operational improvements that they can make to the target company. Without majority control, Cemex may not be able to make these improvements.

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