UltraTech'scapabilitiesinidentifying,andleasing,

higherqualityrawmaterialquarriesresultsinsignificant

costsavingsforthem.

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PRINTINDIANCEMENTINDUSTRY:CANULTRATECHBETHENEXTMARKET

LEADER?StudentContributors:ArjunRKannan,DebabrataGhosh,ManawMohan,PriyankDuttDwivedi,RahulRajJain

ThisarticleanalyzesUltraTech'spresentposition in themarketand its strategies toenhance itspresence in thecement industry. An industry analysis followed by the resource based view of UltraTech highlights UltraTech'sstrengthsandareasofimprovement.Thereafter,afinancialcomparisonofUltraTechwithitsmaincompetitorACCprovides an insight into its cost structure. Through in depth analysis, this article seeks to provide specificrecommendationsonwhatUltraTechmustdoinordertoachievemarketleadership.

Cement demand in India has increased due to the increasing expenditure by the Indian government in infrastructure. As aresult, the participation of larger companies in the sector has also increased. There are a total of 125 large cement plantsand more than 300 small cement plants operating in the country presently. The cement industry is a homogenousindustry with similar nature of raw materials, rising power costs, similar manufacturing and processing units. The natureof the product makes it difficult for any player to differentiate in order to corner a large share of the market. This leads tolow margins and makes the industry unattractive.

On 17 June 2003, the Aditya Birla Group (ABG) acquired management control of L&T Cement and renamed itUltraTech. The acquisition brought in new competitive dynamics. The company has since grown rapidly. It is currentlythe second largest cement producer and is third in terms of profitability.

TheCementIndustry1The cement industry is an interesting one to analyze as on one hand the similarity of raw materials and processing unitsmakes differentiation difficult, while on the other hand large companies are acquiring smaller ones, changing industrydynamics.

Competitors: The Indian cement industry has a large number of fragmented firms. There is also a dearth of new playersas incumbents have already procured key raw material sources, like limestone reserves on long-term leases. Further, largefirms are continuously consolidating by acquiring smaller ones that find it difficult to attain minimum efficient scale ofproduction.

Product: Cement is a bulk commodity and a low value product. It is sold in 50 kg packs as OPC grade 33, 43, and 53. Itis used in all construction activities as a primary constituent of concrete. Due to similar raw material inputs andproduction processes, there is no significant differentiation in the cement produced across firms.

Environmental Issues: Greenhouse gas emissions from cement manufacturing pose a serious environmental threat.Currently, the cement industry generates 5% of India's total carbon-dioxide emissions.2 With stringent emission norms,the production process needs to be made environmentally sustainable. The cost of implementing new productionprocesses that help reduce emissions can be offset by trading certified emission reductions (CERs). CERs are acomponent of national and international emissions trading schemes, implemented through Clean DevelopmentMechanism (CDM) projects, in an attempt to mitigate global warming.3 Credits obtained through implementation of suchprojects can be traded in international markets.

Having studied the cement industry and identified the main issues facing the firms, we engage in an in depth analysis ofthe firm's resources to identify the sources of sustainable competitive advantage

UltraTech'sSourcesofCompetitiveAdvantage4,5The key players in the cement market are Holcim Group, Lafarge Group, ACC and J K Cement. ABG that possessed theGrasim cement unit acquired management control of L&T cement in the year 2003. The acquisition of L&T Cement(later named as UltraTech) turned the group into one of the largest players in the market.

Value chain analysis helps in identifying sources of competitive advantage in a systematic manner, and thus we use thisframework. The cement industry value chain comprises (1) sourcing of raw materials and fuel from quarries and mines (2)the manufacturing process, and (3) distribution of the product to the markets.

The sources of competitive advantage identified for UltraTech are:

Sourcing of Raw Materials: UltraTech's greatest strength is its raw materialsourcing. Limestone quarries are usually leased from the government on a long-termbasis (usually at least 25-30 years). UltraTech's capabilities in identifying, and leasing,higher quality raw material quarries results in significant cost savings for them. Thissource of long-term competitive advantage is due to their people skills which aid inidentifying the sources and their terms of leasing which lock in these resources forthe long term. Clearly, this resource is valuable and rare.

Fuel used in Manufacturing Process: The manufacturing process offers no distinct competitive advantage toUltraTech or its largest competitor ACC, though ACC enjoys lower fuel cost. However, this is not sustainable, and sinceUltraTech has already started switching to coal, ACC's advantage is likely to be neutralized in the near future.

Financial and Human resource advantage: UltraTech, being a part of the Aditya Birla Group, has access to the deep

Inapostmatureindustrysuchascements,firstmovers'advantageintermsof

differentiatedproductsiseasilynegatedthereby

necessitatingtheneedforUltratechtoestablishitselfas

acostleader.

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pockets of its promoters, as well as human capital of the highest quality. While financial resources may be rare andinimitable, non-substitutability is debatable. Evidence suggests that in the long term others like the Holcim group canmatch the financial resources of ABG.6 Higher quality of human capital might be more valuable in the long run, andgiven their astute knowledge of the Indian market, ABG might be able to leverage this resource better than their foreigncounterparts.

A final point to note is that UltraTech has higher operating leverage than ACC. This by itself is neither a source ofcompetitive advantage nor a disadvantage. In the long run, the gains during the 'up' years will be smoothened by the'down' years of the cement cycle.

UltraTechV/sACCAFinancialAnalysis7,8The objective of this financial analysis is to identify specific advantages enjoyed by UltraTech vis-a-vis its majorcompetitor ACC, their relative magnitude and sustainability.

The last few years of this decade have been good for cement companies as prices have remained high, and hence profitshave been good.9 In the same period, UltraTech and ACC have shown the same trends of increasing sales growth andcapacity utilization although UltraTech has done marginally better, and succeeded in closing the gap with its rival.

The cement industry is a "post-mature" industry - an old industry where change is slowand marginal, first movers' advantage in terms of differentiated products is minimaland any advantage is likely to be fleeting and parity would be restored soon enough. Insuch an industry, the only way for UltraTech to be the number one is to be a costleader. Thus, it is imperative to analyze the cost advantages, which ACC and UltraTechhave relative to the each other.

A detailed analysis of the cost structure (Exhibit 1) reveals stark differences betweenACC and UltraTech in raw material and power costs. A comparison of raw materialcosts showed that UltraTech had a huge advantage (nearly double) over ACC due to

greater access to better quality quarries. For the same quantity of cement produced, UltraTech spent less on mining, andgot better quality limestone, than ACC.

A comparison of power costs revealed a different picture with ACC enjoying a cost advantage over UltraTech. This isdue to the higher cost of Naphtha and Fuel Oil based Power Plants used by UltraTech (in addition to coal fired plants)while ACC used only coal based plants. UltraTech wanted to spread the risks of prices and availability of fuel, but thestrategy backfired as coal remained a much cheaper alternative (detailed cost breakups shown in Exhibit 1).

Exhibit1ComparisonofcostsbetweenACCandUltraTech

UltraTechLookingAheadWe look at the trends emerging in this sector and analyze how UltraTech can leverage these to its advantage in the lightof its competitive advantages.

Cost leadership: Striving to become a cost leader by means of setting up captive power plants, and/or up-gradation oftechnology to enhance productivity, is increasingly becoming critical for large cement players in this sector.

Rising Exports: Due to the increasing construction activity in the Middle-East, exports will constitute a major salesdriver. Hence, the coming years would see companies scrambling for bases on the Western coast to minimize their exporttransportation costs.

Retail Stores: A unique concept, which Ultra Tech is experimenting with in recent times, and one that is important forthe future, is to continue setting up retail stores. Other companies like Asian paints, and most recently Tata Steel havetried a similar concept.

Relationship Management: UltraTech should focus on managing its relationships with importers, exporters,distributors, warehouse providers, wholesalers, retailers and dealers for their long-term profitability.

Synergies with Grasim: The two companies under the ABG banner can exploit operational synergies in raw materialsprocurement, manufacturing, common branding, dealer networking, logistics, and exchange of key personnel.

Ready Mix Concrete: Finally, one of the recent trends in this sector is the focus on ready-mix concrete. Therefore, anearly technology and capacity building in this area would determine the strategic moves of cement companies in thefuture.

ConclusionThis article has succinctly analyzed the present state of affairs at UltraTech cement and thus identified its strengths andproblem areas through a variety of tools. While its raw material sourcing, financial and human resource pools are sourcesof competitive advantage, UltraTech has to improve in terms of fuel costs in order to beat ACC to the top position in thelow margin industry. This can also be achieved by leveraging futuristic trends like branded retailing, exports and newproducts like ready concrete mix.

AuthorsArjun R Kannan (PGP 2007-09) holds a B. Tech. in Chemical Engineering from Indian Institute of Technology (IIT)Madras. He can be reached at arjunk07@iimb.ernet.in

Debabrata Ghosh (FPM 2007) holds a B. Tech. in Mechanical Engineering from Vellore Institute of Technology andhas previously worked at TCS, Bangalore. He can be reached at debabratag07@iimb.ernet.in

Manaw Mohan (PGP 2007-09) holds a B. Tech. in Chemical Engineering from Indian Institute of Technology (IIT)Chennai and has previously worked at ITC Ltd. He can be reached at manawm07@iimb.ernet.in

Priyank Dutt Dwivedi (PGP 2006) a B. Tech. He can be reached at priyankd06@iimb.ernet.inpriyankd06@iimb.ernet.in

Rahul Raj Jain (PGP 2007-09) holds a B. Tech. in Civil Engineering from Indian Institute of Technology (IIT) Kanpur.He can be reached at rahulj07@iimb.ernet.in

This article is drafted from the student project done under the guidance of Prof.Rejie George Palathitta ,AssistantProfessor in the Corporate Strategy & Policy Area at IIM Bangalore.

KeywordsStrategy, Cement, India, UltraTech, ACC, Aditya Birla Group, ABG

References1. Report by ICRA Ltd, Publications titled "The Indian Cement Industry", Published March 20082. http://indiatoday.digitaltoday.in/content_mail.php?option=com_content&name=print&id=18143. http://www.cogeneration.net/certified_emission_reduction.htm4. Company analysis report by Research arm of ENAM Securities Pvt. Ltd. Company : Grasim, Published in March

20085. Company analysis report by Research arm of SSKI India Research, Published 5th April, 20076. Economic Times, 3rd Feb 2008, "Holcim to invest Rs 10,000 cr in five years in cement sector",

http://tinyurl.com/ydtx33l, Last accessed on March 10th, 20087. Business Standard, 8th February 2006, "Cement industry in India is on strong foundation"

http://www.ibef.org/artdisplay.aspx?cat_id=528&art_id=9722 Last accessed on April 25th, 20088. Abhinaba Das, Economic Times, July 2005, "Cement demand in south up 22% in Q1",

http://findarticles.com/p/articles/mi_hb5936/is_200507/ai_n23943409 Last accessed on June 25th, 20089. Economic Times, 16th March 2008, "Cement prices to remain firm in medium-term: CMIE"

http://economictimes.indiatimes.com/News_by_Industry/Cement_prices_to_remain_firm_in_mediumterm_CMIE /articleshow/2870707.cms, Last accessed on April 15th, 2008

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