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Building a Mexican Giant

Cemex has burgeoned into a $15-billion firm whose cement helps house people from the United States to Egypt. The foundations of its feat: technology, management savvy and grass-roots ties.

May 21, 2006|Marla Dickerson | Times Staff Writer

CUAUHTINCHAN, Mexico — On a parched hillside here in central Mexico, workers labor around the clock extracting one of the world's most coveted commodities.

It isn't sold by the ounce on international exchanges, but in 110-pound bags in home improvement stores.

The product is cement, a mixture of iron oxide, gypsum, clay and the reddish limestone quarried from these slopes about two hours southeast of Mexico's capital. Not exactly the stuff of a prospector's dream. But for Cemex, the world's third-largest cement maker, the pale dust might as well be gold.

Last year, Cemex turned that simple yet essential commodity into net income of $2.2 billion on sales of $15.3 billion, aided by its acquisition of British cement maker RMC Group. The $5.8-billion deal nearly doubled the company's size. Even for growth-minded Cemex, which has snapped up 16 major cement firms since the late 1980s, it was an aggressive move.

Some analysts worried that Cemex was paying too much for an underperforming European company when much of the action was in booming Asia. Still, Cemex managed to slash costs and free up buckets of cash to start paying down the $10 billion in debt weighing on its balance sheet after the purchase. The company delivered record earnings last year, and its stock ended 2005 up 63%.

Cemex shares closed at $62.03 on Friday, down 2 cents. Despite a recent pullback, the stock is up 6% on the year.

In a recent interview in the company's marble-and-glass headquarters in the northern Mexico city of Monterrey, Chief Executive Lorenzo Zambrano rattled off growth and profitability statistics that have silenced the doubters -- at least for the time being.

"I have been hearing that for 20 years," said the 62-year-old grandson of one of Cemex's founders, referring to the second-guessing of his empire building.

Under his leadership, Cemex has morphed from a regional player into a global powerhouse with operations in more than 50 countries and 50,000 employees worldwide.

Mexico is no longer even its biggest market. That distinction belongs to the United States, where RMC's U.S. facilities, added to previous acquisitions north of the border, have turned Cemex into America's largest maker of cement and ready-mix concrete, the mixture of cement, sand, gravel and water that tumbles around in the cylinders of cement trucks. The U.S. is now the source of more than one-quarter of Cemex's revenue.

That could be a liability as the nation's red-hot housing market cools. But the company has learned to ride the peaks and valleys of a cyclical industry. For two decades, Cemex has delivered compounded annual growth topping 20% in sales and earnings before interest, taxes, depreciation and amortization. It has also built a powerful global brand from a commodity product by combining savvy marketing with technological sophistication -- rare proficiencies in a hard-hat industry.

"They had a vision of the company and what it would look like and how it would operate, and they have followed through pretty consistently," said international business expert John Roberts, who has studied the company as an economics professor at Stanford University's Graduate School of Business, Zambrano's alma mater.

"I teach it as one of the shining examples of what comes from good strategy, good organization and good management," Roberts said.

Those aren't qualities typically associated with many of Mexico's largest companies, where being an FOP, or friend of the president, has long trumped having an MBA. Key sectors of Mexico's economy are dominated by public-sector monopolies and private oligopolies that economists say have saddled consumers with high prices while stunting the nation's growth.

It's a criticism that has also been leveled at Cemex, which controls about half the market in Mexico, where cement prices are higher than those typically found in the United States. Cemex derived 21% of its sales but 45% of its operating income from Mexico in 2005.

The company was instrumental last year in pushing the Mexican government to prevent a ship loaded with low-cost Russian cement from offloading its cargo. Publicity about the stranded vessel and its hapless crew became an embarrassment to the Mexican industry, which at the time was battling to force the United States to open its market to more cement from south of the border.

The U.S. government for years slapped anti-dumping duties on imports from Mexico, concluding that Mexican firms were selling cement in the U.S. at times for less than half what they were charging at home.

However, a resolution to that long-running dispute was reached this year. All duties and quotas on Mexican cement entering the U.S. market will be lifted by 2009, which analysts say could help ease U.S. shortages while benefiting exporters such as Cemex.

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