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Cement demand in India has increased due to the increasing expenditure by the Indian government in infrastructure. As a result, the participation of larger companies in the sector has also increased. There are a total of 125 large cement plants and more than 300 small cement plants operating in the country presently. The cement industry is a homogenous industry with similar nature of raw materials, rising power costs, similar manufacturing and processing units. The nature of the product makes it difficult for any player to differentiate in order to corner a large share of the market. This leads to low margins and makes the industry unattractive. On 17 June 2003, the Aditya Birla Group (ABG) acquired management control of L&T Cement and renamed it UltraTech. The acquisition brought in new competitive dynamics. The company has since grown rapidly. It is currently the second largest cement producer and is third in terms of profitability.
http://tejas-iimb.org/articles/32.php?print=true
2/15/2012
Tejas Article : Indian Cement Industry: Can UltraTech be the next Market Leader?
The sources of competitive advantage identified for UltraTech are: Sourcing of Raw Materials: UltraTech's greatest strength is its raw material sourcing. Limestone quarries are usually leased from the government on a longterm basis (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. This source of long-term competitive advantage is due to their people skills which aid in identifying the sources and their terms of leasing which lock in these resources for the long term. Clearly, this resource is valuable and rare.
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UltraTech's capabilities in identifying, and leasing, higher quality raw material quarries results in significant cost savings for them.
Fuel used in Manufacturing Process: The manufacturing process offers no distinct competitive advantage to UltraTech or its largest competitor ACC, though ACC enjoys lower fuel cost. However, this is not sustainable, and since UltraTech 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 pockets of its promoters, as well as human capital of the highest quality. While financial resources may be rare and inimitable, non-substitutability is debatable. Evidence suggests that in the long term others like the Holcim group can match the financial resources of ABG.6 Higher quality of human capital might be more valuable in the long run, and given their astute knowledge of the Indian market, ABG might be able to leverage this resource better than their foreign counterparts. A final point to note is that UltraTech has higher operating leverage than ACC. This by itself is neither a source of competitive 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.
A detailed analysis of the cost structure (Exhibit 1) reveals stark differences between ACC and UltraTech in raw material and power costs. A comparison of raw material costs 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, and got better quality limestone, than ACC. A comparison of power costs revealed a different picture with ACC enjoying a cost advantage over UltraTech. This is due 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 the strategy backfired as coal remained a much cheaper alternative (detailed cost breakups shown in Exhibit 1).
http://tejas-iimb.org/articles/32.php?print=true
2/15/2012
Tejas Article : Indian Cement Industry: Can UltraTech be the next Market Leader?
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Conclusion
This article has succinctly analyzed the present state of affairs at UltraTech cement and thus identified its strengths and problem areas through a variety of tools. While its raw material sourcing, financial and human resource pools are sources of competitive advantage, UltraTech has to improve in terms of fuel costs in order to beat ACC to the top position in the low margin industry. This can also be achieved by leveraging futuristic trends like branded retailing, exports and new products like ready concrete mix. Authors Prof. Rejie George Pallathitta is a Assistant Professor in the Corporate Strategy & Policy area at IIM Bangalore. He holds a Ph.D. in Business from Tilburg University, Netherlands and a B.A in Economics from St. Albert's College, Mahatma Gandhi University, Kochi, Kerala. He can be reached at muralip@iimb.ernet.in Arjun 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
http://tejas-iimb.org/articles/32.php?print=true
2/15/2012
Tejas Article : Indian Cement Industry: Can UltraTech be the next Market Leader?
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Debabrata Ghosh (FPM 2007) holds a B. Tech. in Mechanical Engineering from Vellore Institute of Technology and has 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.in priyankd06@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 Keywords Strategy, Cement, India, UltraTech, ACC, Aditya Birla Group, ABG References 1. 2. 3. 4. Report by ICRA Ltd, Publications titled "The Indian Cement Industry", Published March 2008 http://indiatoday.digitaltoday.in/content_mail.php?option=com_content&name=print&id=1814 http://tinyurl.com/ydtx33l, Last accessed on March 10th, 2008 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, 2008 5. 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, 2008 6. 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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