If steel constitutes the bones of the industrial economy, then cement is surely the body tissue. And as the Chinese economy continues to bulk up, so too does the demand for cement.
Take, for example, the recent opening of China United Cement Corp’s new plant in Beichuan. The massive facility was built in just 10 months, and has a daily production capacity of 4,800 tonnes.
But paradoxically, despite the sustained demand, the cement industry itself isn’t in great shape.
The problem – as WiC discussed in issue 39 – is one of fragmentation.
There are an estimated 5,500 cement enterprises in China. Contrast that with the international market where a few firms like Cemex, Holcim and Lafarge dominate the marketplace.
“The industry is plagued with the phenomenon of small scale firms using poor equipment, in irrational locations,” says Zhang Jianxing, the executive director of South Cement. Zhang estimates that almost a third of China’s cement is made by low grade equipment that should have been mothballed long ago.
The government is keen to see changes in the industry, and that means consolidation.
A shake-up is underway, leading China Entrepreneur magazine to speculate on the likely winner. Who, it asks, will be the country’s new king of cement?
For most of the past decade that question has been easily answered. Anhui Conch was the biggest player, and its Shandong-born boss Guo Wensan could afford a swagger.
But the Hong Kong listed firm has suddenly found there is a Sasac-backed rival now outproducing it (for more on Sasac, see last week’s Talking Point).
In the past two years China National Building Materials Group (CNBM) has absorbed 140 cement enterprises (the builder of the new Beichuan facility – China United Cement Corp – is one of them).
Many more cement firms have become CNBM subsidiaries and the frantic M&A schedule has propelled its production capacity to 180 million tonnes (and past Anhui Conch), says China Entrepreneur.
Not bad for a company only founded a decade ago.
Back in 2005, CNBM was still producing less than a fifth of Conch’s 56 million tonne annual output. But it steadily made up ground by acquiring smaller competitors: some were run by local government, others were private firms.
Many were losing money before they were consolidated into a new subsidiary, South Cement. In most cases, the original owners stayed on as managers.
In March last year CNBM created North Cement to replicate the approach in the north of the country.
Conch has followed a different strategy. Guo admits that his early experiences with acquisitions a decade ago put the firm off M&A. He had problems with integration and he says that all the work exhausted his key people.
He has since preferred organic growth, where he can retain what he terms the “Conch culture”.
But Conch must be doing something right, as it mixes the lowest cost cement nationwide. Its design institute has also studied foreign competitors, bringing down the cost of building a production line by more than half.
Of course, CNBM’s more acquisitive strategy has meant that its management culture is a little less coherent. That’s acknowledged by boss Song Zhiping, who is recommending that his executives study the Chinese classic, the Water Margin, in response. He wants them to learn particularly from the example of Song Jiang, a guerilla leader who merged 108 different bandit groups into an army.
There look like being more bandits to welcome on board. Next on Song’s radar: a new bout of M&A which could absorb as much as 500 million tonnes of additional output.
How about profits? Little wonder that China Entrepreneur points out that “in the competition for scale CNBM has already won – but in the efficiency competition, the real battle between the two cement giants has just begun.”
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