It’s the economy, stupid – The economic collapse and its effect on the cement industry may have started in ernest in [...]]]> 2009 was year where cement industry news was really dominated by three factors:  the economy, the Chinese, and the environment.  Here are some of the stories we at BGE believe were the most important of the year:

It’s the economy, stupid – The economic collapse and its effect on the cement industry may have started in ernest in 2008, but it really hit high gear in 2009.  Cement producers in North America and around the developed world responded with cut backs in capital projects, plant closures (some temporary, some less so), layoffs and other cost saving measures.  Producers in North America and Europe continue to postpone investments, preserve cash, and fend off price erosion of their product.  The poster child for the pain of a vanishing credit market had to be Cemex.  As the fastest growing member of the global cement producers, funded mostly on gigantic lines of credit, they found themselves on the verge of insolvency, sold off a number of strategic assets, and to admirably survive as they managed to renegotiate billions in credit.

Sinoma International becomes the world’s largest OEM – OEM’s responded with traditional “retrenching” moves, cost cutting and layoffs.  Shoveling expertise into the street with abandon, a trend that is expected to continue.  Those with a small piece of a large pie now found themselves with a small piece of a much smaller pie.  Expect at least one of the traditional Euro-American suppliers to fail in 2010.  Of course, not all the suppliers played defense.  The Chinese OEM’s, Sinoma in particular, took advantage of the increased price sensitivity to become, for the first time in history, the largest supplier of cement equipment in terms of new production capacity OUTSIDE China.  In fact, Sinoma sold just under 50% of the capacity sold outside China in 2009, pushing FLSmidth out of the #1 spot it had held for decades and forever changing the competitive landscape of cement equipment supply.

Big Brother is watching – The environment and the increasingly large specter of regulation has to be one of the biggest stories of 2009.  Environmental sessions were sharply in focus at the IEEE/PCA conference.  The EPA made noise about Mercury and they made noise about CO2.  Eventually they classified CO2 as a hazardous substance, thereby giving themselves the power to regulate it.  New regulations have also been proposed for Mercury and will be a reality sooner rather than later.  We have frequently reported on the various environmental issues in this blog as we see it as a major force in the market for years to come.

Modernization of capacity – 2009 certainly wasn’t all bad news for the cement industry.  Developing markets continued to show growth and reinforce the long term trends in demand.  Additionally, many of the modern, high capacity plants ordered in the last boom came on line in 2009, thus “modernizing the fleet” and providing the ability to produce more cement at a lower cost with less energy and environmental impact.  Holcim’s shining star, the 12,000 mtpd Ste. Genevieve plant designed by FLSmidth, came on line in July and quickly met and exceeded production and environmental targets.  This facility will help to assure the future of cement manufacturing in the difficult labor and regulatory North American market environment and provide a model for cement plant design going forward.

The major producers are clearly focused on developing markets [...]]]> The Financial Times reports today that the major cement manufacturers expect cement demand in Europe and The US to be 30% and 44% (respectively) lower than in 2007. A squeeze on infrastructure projects, thanks to exploding government debts and tightening of spending is primarily to blame, they said.

The major producers are clearly focused on developing markets where demand is more organically and necessity driven. They don’t expect the situation to turn in the developed markets until 2012. Even so, given the time to market for a new production line and the spectre of impending CO2 regulations and their potential impact on capacity, we believe that regions in North America can expect to see cement shortages and high prices in the coming years as a result of the major producers business focus being elsewhere.

This is one of the consequences of the industry consolidation that has taken place over the last decade and a half. As the local independent producers have been absorbed by the global producers, the business focus has shifted from one of defining and fulfilling local market needs to one of looking at complete continents as a single market. This is not necessarily good or bad, it just is. The global producers will be investing their available capital in markets they see as having the largest short term potential. The result is that near term opportunities may be created in the Americas and Europe for those who are willing to take a risk and gain first mover advantage. Demand will continue to grow in these markets, and in some cases that demand might be extremely localized.

We’ve all heard this and most of us have probably fallen victim to it [...]]]> “Why would you waste time changing that? We never had any complaints!” An associate was recently relaying a story to me about how he was trying to improve some of the documentation going to the customer when he was hit with these statements.

We’ve all heard this and most of us have probably fallen victim to it at one time or another. “No news is good news”, “If it ain’t broke, don’t fix it”, “No one is complaining so it must be good” and many other variations. But the truth is quite different. It’s a funny thing about dissatisfaction, far more often than not, someone who is dissatisfied simply walks away, never to return. Some studies show that as few as 1 in 25 dissatisfied customers will choose to complain. The rest will just lock it away, another black check mark against your brand, and when you collect enough black check marks, you’ve lost a customer.

In the “analog” world, a dissatisfied customer might tell 8-16 others about their dissatisfaction by word of mouth. in the digital world, it could be thousands. And, importantly, 91% of dissatisfied customers will never purchase goods or services from you again! Of course satisfaction does not guarantee loyalty. These are closely related, but different phenomenon. It is not possible to have loyalty without satisfaction, but it is quite possible that satisfied customers will not remain loyal. Satisfaction can best be thought of as a willingness to continue in the relationship, but an openness to the next, better, offer. Loyalty is a willingness to continue in the relationship in the face of competition.

There are dozens (perhaps hundreds) of factors that drive customer loyalty. A common factor among many of them is that they are based on a relationship between the customer and the supplier. This relationship may never manifest itself as a dialog between two people, but it almost always does if it is to have truly lasting value. Trust can be built and expectations defined through a simple request-fulfillment loop, but a feeling of engagement comes from someone reaching out to you, being genuinely interested in what you offer, and acting on that interest.

Customers who complain are a gift! Complaints mean the customer is engaged in the relationship. They mean the customer WANTS the relationship to work. If a customer complains and is satisfied with how the complain is handled, they are as much as 10% MORE LOYAL than a customer who has never had any problems. Of course making your customers complain may not be the most desirable way to get them engaged, but if they are engaged they will complain, and you better be prepared to listen and act!

Engagement through involvement in the creative process is a fantastic and positive way to build loyalty, even in a product or service you aren’t ready to offer. Such is the motive behind the proliferation of “open beta” releases by software companies, popularized by Google. “Here, have a look at what we are working on, kick the tires, let us know what you think.” This strategy can be wildly successful as long as you listen and act! On the other hand, it might be the worst business decision you ever make if you think it will get you good PR but you don’t really need to listen to what these early adopters say.

No news is NOT good news. Do not assume your customers are happy, let alone loyal, simply because they do not complain. You need to build relationships with your customers and talk to them even if (especially if) they are not talking to you.

Ours has been a long journey, starting with a melting pot of equipment manufacturers and cement producers who had close ties, progressing through a period of globalization. We watched the Chinese enter the market and examined the response. Today we close our story by taking a final [...]]]> Part five – A new reality and the way forward

Ours has been a long journey, starting with a melting pot of equipment manufacturers and cement producers who had close ties, progressing through a period of globalization. We watched the Chinese enter the market and examined the response. Today we close our story by taking a final look at the realities of the current market and describing a way forward.

As the hangover from the go-go boom period of the last several years settles in for a nice long stay, where are we? What is the status of he relationships between producers and suppliers? How do cement producers choose partners for strategic projects from among the surviving suppliers? How do the equipment suppliers define the value they provide to their customers?

Here are the facts:

First, the majority of the equipment from any supplier is manufactured in China, India or other low cost country. This new reality makes differentiation based on expected quality of delivered equipment a matter of fantasy, supported only by the perception that the higher level of expertise in the traditional OEM’s results in improved specifications and greater quality control, which leads to…

Second, the ties between the engineers and factory floors are, if not lost completely, tenuous at best. The sole exception to this might be, ironically, the Chinese suppliers who maintain their “own” manufacturing capability. In the high stakes world of cost containment and control, it is far too commercially dangerous to allow engineers to interact directly with the “vendor” (even the term is somewhat derogatory). And besides…

Third, as the western OEM’s have increased capability overseas, they have shed experience and neglected succession in their centers of experience. This is especially true in this time of contraction where cuts have been so deep in North America and Europe that it is an exercise in imagination to believe that core competencies have not been lost. While R&D may still (for now) remain the domain of western engineers, the detailed design and project engineering is widely outsourced. The people performing the bulk of the work have no relationships to the customer in general or the plant personnel in particular. Many of them will never see the plant they helped design. It is difficult to make a distinction in real terms between this situation and working with a Chinese supplier.

Cement producers tomorrow will be working with an equipment supplier who, for all intents and purposes, doesn’t know them. Their engineers have not, except in rare cases, shared a country, let alone an office building. They will be purchasing equipment that is manufactured for the lowest possible cost, by people who have never seen the drawings before and will never speak to the engineer who designed the part. These manufacturers do not know the engineer’s intent, nor do they have any real concept of the duty the part will be asked to perform. Cement producers will sit in project meetings across from smiling faces who, while perhaps knowledgeable and experienced, actually have very little control over the work being performed on the project.

Given this new reality, large cement producers will increasingly take their decision on the basis of cost. They can now feel even more confident in their believe that they have more expertise than the suppliers (they have believed this for a long time anyway). Small and independent producers have a more difficult decision. They do not have all the required expertise and need to rely on a network of suppliers and designers that they can trust to serve their needs. While they may be enticed by the lure of low prices, they may not be comfortable with the responsibility that comes along with the decision to work with a Chinese supplier.

There is a place for a new project partner in this new reality. An independent party with technical breadth and depth in cement process and equipment design, knowledge of the local market and competitive environment, the ability to navigate the regulatory maze, a focus on quality as a process, not an afterthought, and most importantly a desire to create win-win relationships for everyone involved in a project. BridgeGap Engineering is an organization of cement professionals from across the matrix of producers, suppliers and manufacturers, with relationships across companies and across continents. We’re here to bridge the communication gaps, translate expectations into reality, and treat your project as a partnership instead of a pricetag. We’re here to provide cement engineering solutions for the Americas from arround the globe.

To this point, everything we’ve discussed in this series has been a trip down memory lane. Today we start to examine the latest changes, and where things stand today.

Western equipment suppliers had already been in a race to remain competitive, and cost reduction was a major focus for the reasons described in Part [...]]]> Part Four: The response

To this point, everything we’ve discussed in this series has been a trip down memory lane. Today we start to examine the latest changes, and where things stand today.

Western equipment suppliers had already been in a race to remain competitive, and cost reduction was a major focus for the reasons described in Part two of this essay. With the threat of Chinese competition on the horizon this accelerated rapidly. While few suppliers felt they could compete with the Chinese on a cost basis alone, it was clear that costs would have to be reduced.

As we discussed, the suppliers had already outsourced the vast majority of their manufacturing, mostly to former eastern bloc countries and other well established low cost manufacturing centers. Soon China as a low cost supplier was part of the strategy for everyone. After all, if Chinese manufacturers had the capability to produce equipment for local supply, they could produce it for the western OEM’s as well. And after all, western designs and specifications were superior and the OEM’s depth of experience was so great that there seemed very little risk in using Chinese factories. In fact the greatest risk feared by most boards of directors was theft of their intellectual property, and the lure of low cost proved too tantalizing to resist.

With very few exceptions, the entire process was treated as a pure cost savings exercise, the stuff of accountant’s dreams. “We’ll just do what we’ve always done, except we’ll do it in China and it will cost less.” Spreadsheets and charts with circles and arrows and PowerPoint presentations proved it to be so. Everything had been considered, shipping costs and risks, intellectual property issues, even additional costs resulting from expected ‘minor’ quality hiccups.

Engineering was approached in a different way, at least initially. The Asian boom and bust cycle and the consolidation of the previous period had reduced the number of suppliers, and these suppliers had emerged with a lean workforce. The more visionary suppliers first looked to low cost engineering centers as a way for them to increase their capacity while maintaining the highest skill sets and flexibility in the western centers. The “experts” would keep the most critical activities in their hands, working together with the customers to provide the highest level of service and the most appropriate solutions. At the same time, they would guide and oversee the activities of skilled but inexperienced engineers and designers in far away lands to take care of the detail work.

Teething pains for these pioneers were not insignificant. Communications technology, while improving daily, was not a substitute for personal relationships and side by side working. Language and cultural barriers had to be addressed, quality was not what was expected and required significant rework in the west. Still, the low cost engineering centers improved and the engineers in the west learned how to work effectively in this new framework.

These “western” engineering centers became the OEM’s key differentiators (aside from technology) between one another, and ultimately in the face of Chinese competition. These were the centers of customer service and innovation, filled with people who could build and maintain relationships with corporate and plant people and stay in touch with their needs. Larger suppliers could boast of fully qualified and capable engineering centers on multiple continents ready to serve the cement producers’ needs.

But for many, engineering was not a differentiator, but another cost to be minimized. Armed with the evidence that SOME outsourcing had been beneficial to the company, allowing more work to be done at a lower cost, it only stood to reason that MORE outsourcing would lead to more benefit. They could even allow themselves to dream of COMPLETE outsourcing, if only engineering could be brought to do things in a more standard, easily replicated way!

The push to standardize design had very little to do with providing the customer with the solution he wanted, and much more to do with providing the solution with the lowest internal cost for the supplier. This is not to say that there are not many valid end user benefits to standardized solutions such as shorter engineering lead times, potential reduced initial and continuing costs and possibilities for improved quality through repetition. All of these factors helped push the concept in the most recent boom. All these factors ALSO helped erode the remaining differentiation between the equipment suppliers on the basis of customized or optimized solutions. Standard solutions moved the traditional OEM’s closer to the Chinese competitors, rather then creating additional differentiation.

Still the strategy was successful. Such was the demand for projects that it was possible to sell standard solutions AND maintain a price premium for the “western expertise” of the traditional OEM’s. But this party would not last forever.

What followed was a near complete breakdown of the “system” that had served the industry for so long. The quality of engineering from the low cost centers was not suitable for the project environment in the Americas or Europe. Project overruns soared and fingers were pointed. Chinese manufacturers, bulging with record levels of business from everywhere, failed to uphold quality to the expectations of the suppliers and had no interest in entertaining any thoughts of re-work. Schedules slipped, costs rose, inferior products shipped, and fingers were pointed. the promise of the traditional OEM’s, seamless and integrated project management and execution, on time and on cost, failed to materialize. Projects were considered successful if the parties involved “only” lost their contingency.

The final installment of this series is next, and there we will look at the new realities of the cement project business. Join us for  Part five – A new reality and the way forward.

Previously we examined the cement industry and the relationship between all the players as it existed for generations, and then looked at how it began to change in the face of globalization. Today our little story about differentiation and changes in the marketplace is going to turn its focus on the relatively [...]]]> Part Three: Enter The Dragon

Previously we examined the cement industry and the relationship between all the players as it existed for generations, and then looked at how it began to change in the face of globalization. Today our little story about differentiation and changes in the marketplace is going to turn its focus on the relatively recent (last decade) impact of the entrance of Chinese equipment suppliers into “western” markets. Certainly no other single change in the environment has had such a rapid or significant influence, one that is sure to make itself felt for the next decade and beyond.

While the cement producers consolidated and grew, and the equipment suppliers fought to remain competitive, the world’s growth markets continuously shifted. Rapid development in the Middle East, Far east as well as India, Latin America and other areas of the world gave the international producers plenty of opportunities for growth and gave the equipment suppliers plenty of opportunities to hone their points of differentiation.

From the outside it might have been easy to believe that China was sleeping from the time Nixon visited until the 1990′s. After all, other than swamping the market with low cost, low margin textiles and cheap disposable products, what impact had the mighty Chinese industrial machine had on the western world? Conventional consumer wisdom told us that the Chinese produced very inexpensive but far inferior copies of goods from “developed” nations. China was equal to “cheap”, and sometimes “good enough”, but never “world class”.

Careful observation revealed a much different picture. The Chinese were manufacturing world class products, they were just doing it for western companies. They were also learning. They were becoming the world’s supplier while focusing their own brands within the nations boarders. True, initial offerings of Chinese branded products left much to be desired in terms of quality, but from the onset the Chinese have demonstrated a nearly bottomless capacity to get better, and to do it quickly.

China’s politics made it nearly impossible to see the cement picture inside the countries borders. Everyone knew there was a lot of cement being produced. What news there was revealed giant hydro electric projects and major infrastructure work, consuming vast amounts of cement. Yet most of the OEM’s had very little contact with Chinese equipment suppliers since the early 1980′s, when they supplied them with a few pieces of equipment and some licenses for old technology. Until about five years ago, cement manufacturers and equipment suppliers alike expressed their market share in terms of “outside China”.

Producers entered and suppliers “re”-entered the Chinese market at approximately the same time. Lafarge and other large producers invested in Chinese cement production. As the licensed technology of the 70′s began to create obstacles to growth, Chinese producers did purchase some new equipment and technologies from western suppliers.

The Chinese equipment suppliers own technology had grown significantly in the period where the gates were closed. Suddenly there was an awareness that these suppliers were capable of manufacturing and supplying a complete facility on the scale that was being demanded by the large cement producers. At first, China’s seeming unquenchable thirst for cement fully occupied the local suppliers, but competition outside China was coming, and coming fast, and everyone knew it.

And come it did. Predictably at first, Chinese equipment suppliers focused on the markets most like China. Markets with a focus on initial cost, less ambitious technology aspirations, large – low cost labor forces, and friendly regulatory environments. These toeholds proved their capability and, at the same time, provided fodder to the established OEM’s. The party line was that Chinese supplied plants were inexpensive because they lacked state of the art technologies, they took longer to erect, had higher operating costs and lower reliability. But they made cement, and in turn made profits for the owners. And they got better.

These early projects did expose the challenges of working with an unfamiliar supplier and without established relationships. Serious gaps between expectations and reality surfaced. Project management issues plagued the process. Quality of supply and suitability of the equipment to the conditions were questionable, and communications were flawed. But the plants were ultimately built. And the savings, while not what was originally expected, were nevertheless real. And they got better.

The cement producers who had invested in Chinese facilities were the first of the majors to take the leap of faith. After all, their facilities INSIDE China were built with Chinese equipment, and running profitably. And let us not forget thet they were already operating from a belief that they were fully capable of completely controlling the design of the cement plant and only needed the OEM’s to provide the labor (and take the risk). They began to consider Chinese supply for more demanding markets, and higher profile projects.

As cement demand boomed, more opportunities were available for the Chinese suppliers. The OEM’s were at (or over) capacity and the market demanded more projects. Equipment suppliers saw their revenues soar, but there was danger lurking in the shadows. In three short years, the market share of Chinese equipment suppliers outside China went from non existent to about 30% of sold capacity, eclipsing all but the very largest of the OEM’s. A rising tide lifts all ships, but this was a disturbing development for the equipment suppliers, and one that could not be ignored.

In the next article in this series we will look at how the cement producers and suppliers responded to the China Factor. Part four – The response

This is the second article in continuing series about how equipment and service suppliers differentiate themselves in the eyes of the cement producers. In the previous article, “One big happy family” we examined the time period where cement producers, equipment suppliers and manufacturers were generally well mixed and experience was widely shared. [...]]]> Part Two: Globalization and Consolidation

This is the second article in continuing series about how equipment and service suppliers differentiate themselves in the eyes of the cement producers. In the previous article, “One big happy family” we examined the time period where cement producers, equipment suppliers and manufacturers were generally well mixed and experience was widely shared. Today we will look at the period of Globalization and Consolidation and discuss how this changed working relationships and how differentiation was defined.

Large cement producers have always been part of the landscape, but beginning in the 1980′s and accelerating through the 1990′s and 2000′s, the industry underwent a fundamental consolidation and a shift toward a relatively few dominant players, surrounded by strong independents.

The trend started off predictably by stronger producers buying weaker ones in their local markets. These mergers and acquisitions had an impact on the entire industry as the benefit of concentrated purchasing power came into play. Generally however, business remained the same between the producers and their suppliers and these merged plants continued (at least from the outside) to operate as independent business entities.

When the multinationals began to snap up producers outside their “traditional” territories is when the game really changed. These mammoth companies were not simply purchasing additional capacity, but were strongly focused on deriving additional business “synergy and value” from their new acquisitions. Synergy typically translated into cost reductions through elimination of duplicate functionality and resources.

Quite quickly the local plants became obvious parts of a bigger organism and were no longer individual decision makers. Centralized purchasing became a new norm, and design began to be coordinated through “corporate technical”. Efforts were made to duplicate equipment and thereby reduce spare parts inventories and make the facilities more consistent. Management teams from HQ and showcase plants were dispatched to the newly acquired properties to institute new processes and ways of thinking, and on and on.

This ‘acquisition and merger’ behavior had a profound impact on the relationships between the cement producers and the network of equipment suppliers. Suddenly, a few producers had the ability to make a market. Decisions processes had always been strongly technically and economically driven, even among the independents, but this period moved the business dramatically and aggressively toward technical uniformity and cost optimization viewed from a higher level Some might argue that the higher levels were less concerned about local cause and effects and far more focused on financial optimization.

The relationship between equipment suppliers and producers changed for another reason as well, the way in which personnel moved through the industry changed. Certainly exchanges were still relatively common, but the large producers now had a vast array of new opportunities available for up and coming employees. Many vertical and horizontal career paths were available inside the producers’ organizations, therefore employees were somewhat less likely to leave to work for suppliers or competitors.

The producers also began to take more and more design responsibility, at least from a point of view of prescribing specifications. These specifications were built from their “collective wisdom”, tended to be quite conservative, and may or may not have been developed in cooperation with any of the suppliers. Producers began to grow their own experts, no longer relying on people coming from outside. This in turn raised higher walls between the various large producers and a fierce defense of talent. No small part of this was accomplished by centralizing the pool of experts around the “mother” region of the producer. National pride and local connection are strong loyalty drivers. This may have looked like globalization from a balance sheet standpoint, but if fact corporate cultures were moving backward and becoming more closed. Suddenly, instead of plants being run by people with connections to the local area, they were run by people from far off lands and different experiences.

Suppliers changed during the period as well. Not immune to the same global economic pressures and in no small part driven by the consolidation among producers, suppliers looked to grow through merger and acquisition and to maintain some reasonable relationship of scale to these large producers. Large suppliers grew larger, and many small suppliers simply ceased to exist.

Also not coincidentally, equipment suppliers began to become much less differentiated technically. If a design succeeded in winning a few key projects with a major producer, it would soon be part of the corporate design specification and a similar design was absolutely necessary if a supplier wanted to have any chance at being selected. This could be accomplished by reverse engineering and/or raiding talent and copying, or by acquisition.

The suppliers also had to change in order to deal with the design influence of the producers in house teams. Design freedom and the influence of the suppliers expertise on the layout and the equipment were increasingly restricted. This presented different challenges for the limited equipment suppliers than it did for those who provide a full scope of equipment and services, but effected all profoundly.

Globalization came as a wave over many of the suppliers as well. Multinational companies expanded their portfolios through acquisitions, influencing corporate culture and management structure in much the same way as occurred for the producers. The largest suppliers were compelled into a strategy of “right sourcing” to low cost centers for certain technical activities in response to cost pressures. Virtually ALL the major suppliers gave up the bulk of their manufacturing capabilities during this time period.

Outsourcing of manufacturing was seen as a necessity to reduce costs and remain competitive. Eastern Europe opened up with a “familiar” labor force but much lower costs. Heavy manufacturing in the US continued on a downward path that had begun many years earlier. Engineers in both the equipment suppliers and cement producers houses lost touch with manufacturing. Much as the producers believed they could specify a cement facility to such a level that anyone could provide it, the suppliers believed that so long as their manufacturing specifications were sound, they could have their equipment made anywhere without consequence.

Differentiation became increasingly difficult through this period. On one hand, cement producers believed themselves qualified to prescribe the complete design of the plant, and believed as well that if they specified the plant correctly, any supplier should provide the same solution. Differentiation was then a simple matter of the lowest cost that met the specification! On the other hand, they still wanted the accountability for the success or failure of the design to lie with the suppliers. The suppliers, meanwhile, were desperately working to hold their own influence over the design of the equipment and the layout of the facility as a way to differentiate themselves from their competitors.

Manufacturing and related quality and delivery was no longer a card they could play since virtually all of them were using the same or very similar sources. Suppliers still relied heavily on a local presence of expertise as a key differentiators, even though they were already working on outsourcing significant portions of the work and even though the producers put less and less weight on the suppliers experts and more and more on their own.

Somewhat of an adversarial relationship developed between the largest, most technically focused suppliers and the largest, most technically focused producers during this period. At a corporate level both sides felt they had experience and skill sets to define the best solutions and saw the other as a threat at worst and an annoyance at best.

Next time – Part Three: Enter The Dragon