Differentiation – Part Three

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