Imperatives for Indian cement companies in current slowdown
The International Monetary Fund (IMF)[ ] in the global economic outlook published in October, talked of "synchronised slowdown, with growth at its slowest pace since the global financial crisis". The effects of this slowdown in India - driven partly by global outlook but also due to internal factors have become increasingly visible over the last few quarters. Almost all consumptions, investments and industrial indicators point to a dip in demand and industrial activity. The cement industry, which is intrinsically tied to the overall GDP growth, has also seen a marked decline in growth. Cement sales grew by a meager 1 per cent in H1 FY20 (v/s H1 FY19).[ ]
Given the slowing demand, sluggish pricing, and upward pressure on RM prices, cement companies will be under tremendous pressure to achieve and meet their financial targets and goals. The considerable challenges notwithstanding, we believe the current challenge offers an opportunity for cement companies to work on a set of concrete actions to outperform, specifically in five areas:
Drive trade volumes through tight dealer level sales planning, driving execution rigour: In a buoyant market, stretch targets flow easily from top down to the salesforce with implicit acceptance of untapped potential and focus on effort required to channelise it. As any sales manager would attest, the reverse happens with an equal effect in a slowing market - targets and past numbers are deemed too aggressive in the current context (and rightfully in many cases). However, in most cases - top down sales planning, placing too much focus on market sentiment leaves significant value on the table.
Focused bottom up sales planning process grossing up from the individual retailer and dealer level, based on data (e.g. last 6/12 m sales trend, best ever numbers) can help effectively de-average actual potential from sentiment. While most companies have a bottom-up process on paper, the real value of this exercise derives from the planning rigour. Another key component is planning and executing cross-functional support at a dealer level - e.g. marketing and technical support at target counters (e.g. where higher growth is planned or new retailer addition is targeted), rather than siloed functional plans.
Any sales plan no matter how robust, is only as good the execution and review rigor. Having a clear cascaded review mechanism rolling all the way up to the CMO/CEO (e.g. review top 20 dealer sales performance and not just overall sales numbers), at a minimum weekly frequency (end of month is too late for any meaningful action), and visibly rewarding outperformers are some best practices for ensuring execution rigor. As part of a recent BCG work with a cement company, we deployed our sales planning and execution methodology. Without exception, in each of the districts across five States, the targets signed up at the end of the bottom-up exercise were higher than the initial top down estimates. Execution rigor was instilled from top with CEO and CMO reviewing performance at a weekly level. Within a couple of months, 15 to 20 per cent incremental sales volume was unlocked across markets. An important by-product of the weekly reviews was faster issue identification and resolution (e.g. need for a new depot or transporter, insufficient marketing material or even need to rethink BD strategy) which would have usually taken a few months to surface. Over the course of more than 18 months, the client was able to see a 2x increase in sales volume (without any additional capacity).
Tap into Government and infrastructure spends, work to promote new applications: A rigorous planning and execution process is even more relevant for the non-trade segment where the sales cycle is preceded by a number of approval processes. In the event of a prolonged slowdown in real estate activity, government and infrastructure spending is going to be all the more important for cement players. Cement companies need to put higher focus on promoting this segment internally û in terms of top management attention, dedicated senior managers/KAMs for top projects, and focused sales and execution force backed with support from quality and dispatch teams.
In addition to existing applications, the cement industry should also work together closely to promote other applications. A case in point is AAC blocks (autoclaved aerated concrete), which is a green and lightweight substitute for conventional red bricks, made with Fly ash accounting for 70 per cent of RM and cement being an additional 22 to 23 per cent. While AAC has been around for a long time, they are a relatively recent phenomenon in India and are still a small share of the market, and offer an opportunity for cement players to expand their volumes and extend their application in residential, commercial and industrial activities.
Invest in digital transformation effort to unlock value across the value chain: Any downturn presents a necessity and an opportunity to fix and transform processes and unlock additional savings and new ways of working. The current context is no different except for one crucial element - the opportunities unlocked owing to advancements in analytics, technology and automation (collectively Industry 4.0). In an industry that hasn't seen major technological breakthroughs for decades, this presents a host of opportunities. Among the many Industry 4.0 solutions on offer, we believe that five in particular hold the greatest potential for cement manufacturers today:
Analytics-driven predictive maintenance thereby preventing extended downtime, avoiding unnecessary damage, improving operational efficiency, and reducing maintenance costs
End-to-end optimisation via digital twin to mirror the entire production process through a digital modelof the plant's physical assets, processes, and systems - and use artificial intelligence (AI) and machine learning to optimise it
Predictive quality analytics allowing companies to accurately forecast cement quality in real time at any point in the production process thereby reducing the overspending and uncertainty associated with current regimen on physical tests
Alternative fuel optimisation through more accurate predictions of calorific value and optimisation of fuel blends. The potential for this use case is illustrated by the fact that energy expenditure account for approximately 45 per cent of cement production costs, and alternative fuels account for <18 per cent of overall fuel use globally
Integrated control tower to help monitor the ongoing production process, responding to deviations in the entire process from mine to plant, and planning support interventions
While the above examples focus on manufacturing, the opportunity to leverage digital to unlock savings holds true across logistics, sales and other parts of the value chain. Driving product and brand differentiation and innovation: Over the past few years and even decades, innovation and differentiation in the cement industry efforts have been fairly incremental, when compared to other industries especially in consumer and financial sector. While there have notable efforts by a few players in this direction, the opportunity space is vast.
A key disruption theme across industries has been to move towards becoming an integrated solutions provider to the consumer. Cement companies have so far by and large been a cement manufacturer leveraging a two-third tiered distribution channel to supply cement to its consumers. Like seen in many industries around the world, disruption lies in going closer to the consumer through a combination of digital and physical innovations, and broadening the offering beyond cement to become a full stack building solutions provider (both products e.g. construction chemicals, aggregates, steel, etc. and also services e.g. create ecosystem of service providers, e.g. masons, architects).
Another opportunity lies in driving real and significant product mix change with composite cement. Having been launched by multiple players particularly in East India owing to its RM sustainability and cost advantages, the road ahead for composite cement lies in creating a compelling shift for the consumer, based on right quality through optimal blending and focused branding and marketing efforts.
Industry imperative for consolidation
The Indian cement industry has and remains fairly local and fragmented. The last decade has seen a number of acquisitions, most notably UltraTech adding significant capacity from Jaypee, Century & Binani Cements. At the same time, some new players like JSW, Wonder, Emami, Nirma, etc. have entered the fray. At a net level, share of top five players in the country has not changed materially (roughly 40 to 45 per cent) over the last 10 years. We believe the current economic climate in terms of slowing growth and paucity of funding presents an opportunity for further consolidation by some of the larger players. We also expect private equity to be active in this space betting on long term fundamentals of the sector and broader cyclical upturn in the economy.
1.International Monetary Fund
2.Hindu Business Line coverage on Cement dated October 15, 2019
3.India Cement review & CARE Ratings article on AAC Blocks
4.Why Cement producers need to embrace Industry 4.0 - BCG report, 2018
ABOUT THE AUTHORs:
Amit Ganeriwalla is a Managing Director and Senior partner at BCG, Mumbai and leads BCGs Manufacturing & Process Industries practice globally. He can be contacted on: firstname.lastname@example.org
Rahul Sanghvi is a Principal at BCG, Mumbai and works extensively with industrial companies including cement. He can be contacted on: email@example.com