CEE Jul-Sep-2012

:..- 1 supply cement in bulk to the manufacturers of precast products and then use RMC as distribution channel for their cement. The sales of cement in bags hardly constitutes 10 - 15% of the total cement. This growth strategy of the MNC cement giants has successfully emulated by mid market cement company like Bursa Cement in Turkey, which produces pre cast products, supplies Ready Mix Concrete and thus consumes nearly about 60 - 70% of cement produced captively. However, in India the same strategy adopted by some of the leading cement manufacturers is yet to be proved to be successful as 1. Captive consumption of cement through Ready Mix Concrete is just hovering around 3-4% of the total cement produced. 2. The capacity utilizations are in the range of just 30- 40%, indicating severe underutilization. 3. The operating margins are in the range of 4 - 6% and ROCE for the most of cement companies in RMC business is negative. What cement companies in RMC business can do to make the business grow and profitable? There are many articles and studies which argue that it is only matter of time that the RMC in India shall grow and RMC penetration in India shall reach to the levels as has been seen in the mature markets. However key to this shall largely be dependent on the ability of RMC players to increase the universe of RMC users and converting current non users into users. The graph below shows the growth patterns of key players in RMC business in last 4 years 4 3 2 1 0 Trends in Concrete Production in Million M3 - ACC Concrete - lafarge._________ 2008 2009 2010 2011 What we see is either static or very low growth for a player in RMC business in an industry where the use of RMC is seeing a CAGR of nearly about 20 - 25%. This clearly highlights the point that the leading players in this business have failed to create any position for themselves in this space. While there are more and more users who need RMC for their construction activity but the proportion of these wanting to buy from any RMC player is decreasing. A key aspect of the RMC market in India is that it is a predominantly low grade or medium grade concrete market, where the users producing it themselves in own captive batching plants do not see as any major technological challenge. Grade of Concrete Approx. Operating Margins per M 3 Low- M1 0 to M20 400-500 Standard or Medium 600-800 - M25 to M40 High- M45 to M55 1000-1200 Very High- M60 & above 1500+ Any player in this business focussing on the ordinary or medium grade of concretes is likely to face tough customer resistance that will force it to compete on prices like any other commodity market and hence result in lower returns. High grade of concrete like M45 or above require stringent process control and technical expertise, which may not be available with all the customers. Yet this as an area of opportunity is ignored by most players in this business, even when the operating margins in these grades are nearly 3 times than the operating margins in low or medium grade concretes. There is also a significant chunk of customers, who still continue use traditional volumetric mixing by manual methods. These customers are mostly Individual House Builders and Small Builders & Contractors, who cannot set up dedicated batching plants because of small volumes and are also ignored by those who set up batching plants for commercial sales of RMC. Hence in nut shell commercial RMC manufacturers on one hand ignore the market which need then, ignore products which can get higher value; and on other side they run after the customers who do not need them and focus on products which cannot be differentiated. End result is a "Red Ocean" fight for market share of a limited market and this fight invariably leading to price cuts, extended credits etc. finally resulting into bad debts and loss of profit for the business. The need for the commercial RMC manufacturers to make this business profitably grow is create a "Blue Ocean" demand by focussing on entirely new set of customers who need them and on new products. Using BOS framework the four actions needed for profitable growth can be summed up as follows 4