An alternative business strategy for the South African cement industry, in view of the imperatives imposed by the 1994 political changes

Makhoba, Moses M. (2000-12)

Thesis (MBA)--Stellenbosch University, 2000.

Thesis

ENGLISH ABSTRACT: The changing political landscape, which culminated in the all-inclusive election of 1994, enfranchised the previously excluded majority voters and ushered into SA a government with a different agenda. This was an important landmark in the development of the SA business environment. Having pledged itself to improve the social and economic standards of the poor majority, the ANC-COSATU-SACP led government is committed to the elimination of barriers to enter any industry and stimulate the economy in order to improve employment opportunities. Until 1996 cement producers in SA co-operated under an official cartel that facilitated price-fixing and joint marketing and distribution. This study shows that during that period the industry recorded a healthy performance until 1996 when the cartel was dissolved. The industry performance suddenly plummeted in1996 and since then has remained on a downward trend. Analysis of the industry confirms that the industry has the characteristics of a monopoly. Three producers, namely PPC, Alpha and Lafarge, dominate the industry. The "big three" control almost 100 percent of the cement market with a cross ownership of assets which straddle the whole cement industry' in SA. Besides the assets along the cement value chain, the industry effectively has sole control of alternative cement materials businesses, namely ash and slag, and owns significant interests in aggregates and ready-mix concrete businesses too. The dissolution of the cartel in 1996 effectively disallowed price fixing, joint capacity planning and any other collusion as defined by the Competition Act of 1998. Subsequently, players are expected to fiercely compete in an industry that is an oligopoly. According to classical economics, co-operation is the effective conduct to survive in an oligopoly. Hence the contradiction between national expectations and structure of the industry creates a dilemma for asset owners. The principal barrier to entry into the SA cement industry emanates from the high capital investment requirements. This study shows that it is mainly the clinker manufacturing component of the value chain that requires very high investments. A group of small entrepreneurs, engaged in blending cement with ash or slag and selling the product in competition with equivalent products from traditional producers, has successfully entered the lower end of the industry. This is testimony to the fact that sections of the value chain have no barriers to entry. It is believed that as producers of clinker face high sunk costs they have reason to encourage more clinker content in their cement products. They may, therefore, stifle further development of alternative materials. The national imperative - to breakdown concentration of industries to allow for easy entry - seems to be in conflict with the profit motive that businesses to survive. This study therefore recommends an alternative strategy that could accommodate both views. An amenable strategy is for the industry to be redefined into three distinct subsectors with minimal cross-ownership of assets. The three sub-sectors are: 1. Clinker manufacturing: Clinker is a commodity that requires high investment costs. The sector should therefore be offered legal dispensation to operate as a monopoly but with enough regulation to ensure efficiency. It is recommended that players in this sector are allowed to co-operate for efficiency reasons and prices are strictly controlled by a regulator. The regulator must also ensure that the manufacturer is prohibited from owning interests in any other cement sub-sector, to eliminate industry control by a few. w Thus this sector must be rid of interests in aggregate, alternative materials and readymix businesses. 2. Cement manufacturing: A sub-sector for the manufacture of cement, clearly distinct from clinker production should be created. Processes for this sub-sector will commence with milling of clinker into cement and extend to marketing and distribution to end users. 3. Alternative cement materials: In view of economic stimulation, the development of alternative materials to compete with clinker should be encouraged. This sub-sector should be charged with research and development of these materials, and be allowed to blend them for marketing and distribution to end users. There are many implications that emanate from the myriad of stakeholders. Besides local owners of cement assets in SA, international asset owners and entrepreneurs in SA form part of the stakeholders. Thus shrewd planners will be required to champion this idea. It is therefore recommended that a team of academics and business practitioners be commissioned to investigate this and take it further.

AFRIKAANSE OPSOMMING: Die veranderende politieke omgewing, wat uiteengeloop het op die 1994 verkiesing, het die meerderheid kiesers tesame met die nuwe regering in 'n nuwe bedeling ingelei. Dit was 'n belangrike baken in die ontwikkeling van die Suid Afrikaanse besigheidsomgewing. Die nuutgevonde ANC-COSATU-SACP regering het homself toegewy aan sy beloftes om die sosiale en ekonomiese standaarde van die arm meerderheid van die bevolking aan te spreek, en daarmee saam om toegang tot industrie te vergemaklik, die ekonomie te stimuleer en werksgeleenthede te bevorder. Tot 1996 het sement vervaardigers in SA onder 'n offisiele kartel geopereer. Die kartel het gesorg vir fasilitering van prysbepaling, en gesamentlike bemarking en distribusie. Hierdie studie dui aan dat die sement industrie floreer het tot 1996, waarna die kartel ontbind is. Sederdien het die industrie in duie gestort, en is steeds in 'n afwaartse tendens. 'n Analise van die sement industrie toon die karaktereienskappe van 'n monopolie. Drie vervaardigers, nl. PPC, Alpha en Lafarge, domineer die industrie. Die "groot drie" beheer byna 100 persent van die sement industrie, en het verdeelde besitting van alle bates. Daarbenewens beheer hulle ook gedeeltelik of ten volle alle alternatiewe sement materiale besighede en ander verwante belange. Die ontbinding van die kartel in 1996 het effektiewelik prysbepaling verbied, asook gesamentlike kapasiteitsbeplanning en enige ander sameswering soos bepaal deur die Wet op Kompetisie van 1998. Dit word dus van alle spelers in die industrie verwag om gelykmatig te kompeteer in 'n oligopoliese industrie. Dit het egter 'n dilemma veroorsaak rondom die eienaarskap van voorheen gedeelde bates. Kapitale investering is die primêre verhindering tot toegang tot die sement industrie. Hierdie studie toon dat dit hoofsaaklik die klinkersteen vervaardigings komponent is wat groot investering vereis. 'n Groep entrepreneurs het 'n produk ontwikkel deur sement met as te vermeng, en sodoende 'n laer kwaliteit steen te vervaardig waarmee hulle suksesvol in 'n sekere marksegment meeding. Dit is getuienis van die feit dat sekere dele van die waardeketting relatief maklik binnegedring kan word. Die huidige vervaardigers van klinker produkte is onwillig om alternatiewe podukte te vervaardig, aangesien hulle die hoë koste van hul toerusting en die dienooreenkomstige kapitale investing moet regverdig. Die regeringsvisie om groot industrie af te breek om sodoende toegang tot industrie te vergemaklik, blyk in teenstelling te wees met die winsgerigtheid van besigheid. Hierdie studie stel 'n alternatiewe strategie voor wat beide visies kan akkomodeer. Dit stel 'n strategie voor wat die industrie sal herdefinieer in drie sub-sektore met minimale deling van bates. Hierdie sub-sektore is: 1. Klinker vervaardiging: Klinker is 'n kommoditeit wat groot kapitale investering vereis. Hierdie sektor moet dus toegelaat word om binne perke as 'n monopolie te opereer, met genoegsame regulering om effektiwiteit te verseker. Dit word voorgestel dat spelers in hierdie sektor toegelaat moet word om te koopereer om optimale vlakke van produksiekoste te handhaaf, en dat pryse streng gekontroleer word deur 'n regulerende liggaam. Hierdie sektor moet ook verbied word om enige ander besigheids en finansiele belange te hou by enige ander sement industrie sektor. 2. Sement vervaardiging: 'n Subsektor vir die vervaardiging van sement, duidelik onderskei van klinker vervaardiging, moet geskep word. Prosesse vir hierdie subsektor sal begin met die maal van klinker en bemarking en distribusie insluit. 3. Alternatiewe sement materiale: Die ontwikkeling van alternatiewe produkte om te kompeteer met klinker moet aangemoedig word. Hierdie subsektor moet hul toewy aan navorsing en ontwikkeling, sowel as vervaardiging, bemarking en distribusie. Daar is baie implikasies wat voortspruit vanuit die magdom belanghebbenes. Bo en behalwe die plaaslike eienaars van sement bates in SA, vorm internasionale bateeienaars en entrepreneurs ook deel van die belanghebbenes. Dit word dus voorgestel dat 'n span bestaande uit akademici en besigheid aangestel word om hierdie voorstelle verder te ondersoek.

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