tong yang cement

CASE: GS-14B DATE: 10/10/96 (REV’D. 02/05/04)

This case was prepared by Glen Schmidt (Ph.D. candidate),under the supervision of Dr. Seungjin Whang, Stanford University Graduate School of Business, and Dr. Hau Lee, Stanford University School of Engineering, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The assistance of the Tong Yang Cement Corporation is acknowledged. The May, 1995 MS Thesis “The Globalization Strategy of Tong Yang Cement Corporation” by Pu-Young Chae, Massachusetts Institute of Technology Sloan School of Mgt., was used as a reference in preparing this case. Specific details or situations may be intentionally altered.

Copyright © 1996 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

TONG YANG’S CEMENT (B): DEMAND FORECASTING AND GLOBALIZATION

Note: Refer to the case “Tong Yang Cement (A): Logistics & Incentives” (Case A) for background information regarding the Tong Yang Cement Corporation. Introduction Mr. Jay Hyun was spending the day with the staff of Tong Yang’s Cement Corporation, reviewing the performance of its recent (1993) Samchok cement plant expansion. The plant was now the world’s largest single-site facility, and Korea’s1 voracious appetite for cement was expected to consume the bulk of Samchok’s output for the immediate future. Although smaller than the state of Virginia, Korea was projected to consume 2/3 as much cement as the entire U.S. in 1995. Korea’s 1992 annual per capita consumption of 1,069 kg was more than five times that in the U.K., more than three times that in the U.S., and challenging to overtake Taiwan’s world-leading consumption of 1,122 kg/person. The performance of Korea’s cement industry had been stellar as of recent years, achieving an average 9.1% return on equity over a 4-year period as compared to 5.6% for industry in general. (See Appendix I for Tong Yang’s financial position.) Mr. Hyun, a 1981 graduate of the Stanford GSB, had overseen several expansions of the plant since assuming the Presidency of the Tong Yang (TY) Cement Corporation in 1983, and later as Chairman of TY in 1989. Revenues from the cement business had helped fuel TY’s more recent growth into other ventures such as the TY Securities Co., the TY Investments & Finance Corp., and the TY Home Appliance Division.

1 Throughout the case, “Korea” refers to South Korea unless otherwise specified.

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Tong Yang Cement Corporation (B): Demand Forecasting and Globalization GS-14B

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Looking back over the Cement Company’s growth of the last decades, Mr. Hyun observed that demand had at times outstripped supply, possibly because the models used for demand forecasting did not fully consider the impact of economic growth and the rate at which development was occurring. At the same time, Mr. Hyun was wondering whether the Korean market was becoming saturated with capacity, and how to sustain TY’s growth in light of that possibility. At the conclusion of his staff meeting, he commissioned a study of the company’s strategy regarding globalization. Korea’s Demand Growth Consumption of cement in Korea was less than 1 million tons in 1960.2 In the late 1960s, the government began to build an infrastructure of roads, dams, and harbors. In 1970, the New Village Movement precipitated building of new homes, and the 1980s saw construction of more homes and factories. The 1988 Seoul Olympic Games and continued industrialization were further contributors to increasing demand. By 1994, consumption had reached 50 million tons, and was growing at a rate of about 3 million tons per year. As shown in Figure 1, domestic production largely tracked consumption, with slight net exports prior to 1990 (< 5 million tons) and net imports of 5 and 4 million tons in 1991 and 1992, respectively. Figure 1. Korean Cement Production & Consumption

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1960 1965 1970 1975 1980 1985 1990 1995

Mill

ion

tons

o Consumption

x Production

TY expanded its capacity periodically in an attempt to keep pace with the increasing demand. Eight expansions were initiated over the years, as shown in Figure 2. As implied by Figure 2, the Samchok facility was the only plant in Korea in 1957. (The plant was one of several originally built by Japanese cement companies such as Onoda and Ube during the Japanese occupation of Korea from 1910 to 1945, but due to the Korean war and separation of North and South, by 1957, only one remained in the South.) Capacity expansion is “controlled” by an alliance of competitors (the Korea Cement Manufacturing Association), of which all eight major manufacturers but Koryo are a member. This group interacts with governmental agencies concerning issues relevant to all members, and 2 Throughout the case, a “ton” refers to the metric ton of 1,000 kg rather than the English ton of 2,000 lb.


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coordinates sharing of technical information as members see fit. Additionally, the Association implicitly sets the rules of competition among its members. While not legally bound to adhere to these rules, most member companies generally have found it in their best interests to do so. Figure 2. TY Capacity at Expansion Points, as Compared to Industry

Expansion Number

Completion Date

TY capacity, tons (000)

Industry capacity*, tons (000)

At purchase 1957 80 80 1 1959 180 180 2 1961 380 380 3 1968 1,000 3,000 4 1975 3,000 11,000 5 1978 4,000 16,000 6 1985 5,000 23,000 7 1990 8,000 38,000 8 1993 11,000 48,000

* Estimated Demand Estimation To obtain demand estimates, TY utilized per capita consumption data. In particular, historical data for developed countries, such as Japan and those in North America and Europe, were studied in an attempt to predict demand growth. For example, Figure 3 provides historical cement consumption data for several countries. These data, along with population data, were used to calculate per capita consumption as shown in Appendix II. Figure 3. Historical Cement Consumption for Japan, U.S., and U.K.

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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

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U.S.

Japan


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Mr. Hyun decided that in order to plan for the future, TY needed to know if they were hitting the maturity phase of the product life cycle curve for the Korean market. Furthermore, he felt that TY needed to explore a globalization strategy to insure future growth of the company, particularly if it was determined that Korea’s consumption had peaked, and to prepare for the Korean market’s eventual decline. Accordingly, he asked his planning department to accumulate data on the top cement producing countries. The data are shown in Figure 4. This background is the point from which the Planning Department began its investigation of possible globalization strategies. Figure 4. Statistics for the Top Cement Producing Countries, 1992

Production, million tons

Consumption, million tons

Export, million

tons

Population, millions

Per capita consumption,

kg (000) China 308.2 302.7 6.5 1,187 255Former Soviet 100.0 99.4 0.9 292 340Japan 90.8 82.8 11.5 124 666USA 70.2 76.2 0.4 255 299India 53.7 52.9 0.8 867 61Korea 42.6 46.7 1.7 44 1,069Italy 41.4 44.5 0.3 58 770Germany 33.2 36.6 2.5 80 455Turkey 30.2 26.0 4.5 59 443Mexico 26.8 25.8 1.3 90 286Spain 26.1 26.1 2.2 39 666Brazil 23.9 24.1 0.7 147 164France 22.6 21.5 2.4 57 376 Framework for Developing a Globalization Strategy The Planning Department began development of a globalization strategy by creating a framework from which to view alternative markets. Factors to be considered included macro-economic issues, market factors, and production factors as follows:

Macro-economic factors • Government policy regarding foreign investment • Status of the economy • Cultural backgrounds and similarities to Korea

Market factors • Size of market (population) • Current status of the market (competitor’s strength) • Marketing infrastructure currently in place • Quality of cement required (e.g., tall buildings require higher quality)

Production factors • Limestone availability (and proximity to point-of-use) • Labor availability • Transportation infrastructure currently in place


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Within a given market, there might be a number of alternative approaches to pursuing a business venture. The possibilities deemed most appropriate include the following:

1. Export (clinker). For all but the very closest countries geographically, export of finished cement is not considered viable because of excessive transportation costs. Clinker are more readily transported and stored, as they need not be protected from rain and do not deteriorate as readily. Milling of clinker into cement is a relatively easier operation to perform at the final destination, with relatively less environmental impact as compared to clinker production. (See Case A for more details regarding the cement manufacturing process and the characteristics of intermediate products.)

2. Foreign direct investment or joint venture; producing clinker, cement, ready-mix

concrete, and/or piles in the foreign country. Production within a country could involve any combination of the above products. For example, TY could produce and sell clinker only, or could buy cement from a local producer and sell ready-mix concrete, or could buy ready-mix concrete and produce piles, or could be more vertically integrated and produce all products, as TY currently does in Korea.

Each option requires a different level of technical expertise and capital investment, and

offers various levels of learning within a given market. For example, there is considerably more technical competence involved in producing clinker than in producing cement from clinker. Also, it was felt that ready-mix concrete plants could offer a forum for learning about local market and business situations without a huge capital investment.

3. Contractual (licensing of technology within the foreign country). Since cement is a

commodity product best produced by a continuous flow process, the technology lies primarily in the process design, along with design, construction, and operation of the production facilities. Accordingly, a licensing agreement could take the form of TY providing a turn-key operation, or providing technical consultation in the above areas.

The appropriate form of investment in a given country was determined by examining where TY stood in regard to three dimensions: 1) Potential market size of a local country; 2) Distance from Korea; and 3) Competitive advantage as compared to local or international competitors. Export was deemed most appropriate when distance is small; foreign direct investment and joint venture were judged favorable when competitive advantage and market size are large; and contractual agreements were considered appropriate when competitive advantage is strong. Country-by-country Analysis With the above framework in hand, TY continued the globalization study by performing a country-by-country analysis of 10 locations. These countries were selected because of their attractiveness along the aforementioned dimensions. Primary considerations included the potential size of the market demand (population and economic growth), projected governmental investments in infrastructure, geographic accessibility, and cultural similarities. Figure 5 provides statistical data, while Appendix III shows geographical proximity of the countries. In addition to the ten countries for which further analysis is provided below, Thailand and Taiwan


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also merit comment. Both of these countries are experiencing double-digit growth, and are expected to experience severe shortages of cement in the late 1990s. Figure 5. Statistical Data for Selected Countries

Million tons of cement Produc-

tion, 1992

Export, 1992

Consump-tion, 1992

Consump-tion, 1994

Pop-ulation,mil.*

Per capita, 1992*

km (000) to TY

Infra-structure

expend.**

GDP, billion $ ***

Korea 42.6 1.7 46.7 48.0 44 1,069 --- 272 3,365China 308.2 6.5 302.7 350.0 1,187 255 0.5Japan 90.8 11.5 82.8 80.0 124 666 0.8Indonesia 18.6 1.7 17.6 21.3 192 92 4.8 71 1,480Malaysia 12.4 0.0 8.1 9.9 19 435 4.9 54 617Philippines 8.9 0.2 9.2 9.5 66 140 2.5 38 507North Korea 6.0 1.0 5.0 23 220 0.2Vietnam 4.5 0.2 4.8 6.5 71 67 3.5Singapore 2.5 0.1 3.2 3.7 (1993) 3 1,030 4.3 28 435Hong Kong 1.7 0.4 3.8 4.0 6 625 2.1 62 1,107Myanmar 0.4 0.0 0.5 44 12 6.1Thailand 22.4 0.0 22.8 28.7 58 396 4.5 55 1,199Taiwan 21.4 1.2 23.3 27.0 21 1,122 1.5 162 1,967 * Population in 1992 in millions & Per capita cement consumption for 1992 in kg (000). ** Projected expenditure on infrastructure during 1993-1999, billions of $. *** Projected Gross Domestic Product during 1993-1999, billions of $. All ten countries are located in the Asian/Oceania market where the highest growth in cement production over the past five years has taken place, and is expected to continue. While this area consumed less than 1/3 of the world’s cement production in the early 1980s, it is expected to comprise over 1/2 of the market by the year 2000. A cement shortage of nine million tons is expected in 1997. The country-specific analysis was first performed without consideration of the political climate of the country. Then, governmental situations were taken into account and the appropriate modifications made to the globalization strategy. China - China’s cement production of 300 million tons annually is accomplished with 400 kilns,

however many are small and old, producing low grade cement. Only about 20 kilns are considered to be of current technology, with an output of 40 million tons. Accordingly, there is significant potential for introduction of new technology. Raw material sites are available, but many are not near highly populated areas, and the transportation infrastructure is weak.

Demand for high quality cement (around 15% of total cement demand) currently outstrips

supply. Furthermore, this demand is expected to triple by the year 2000, while overall cement demand increases by around 10%. The government has plans to adopt new technology to secure capacity of 50 million tons, and expects the industry to eventually be a net exporter to earn foreign currency. Foreign direct investment is restricted, and high tariffs are imposed on imports.


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TY considers itself to have technological competitive advantage, but because of the above

governmental factors, considers joint ventures to be the most viable alternative for gaining access to this market.

Because of the location of limestone reserves relative to population centers and lack of

transportation infrastructure, large scale plant construction would be considered risky. On the other hand, investment in storage silos and ready-mix concrete dealers is a shorter term investment and these facilities can be located near large cities.

TY has already formed a strategic alliance with Chia Hsin of Taiwan, for a 1.5 million

ton/year plant in Naujing (currently China’s largest is 1.37 million tons/year) and 3 REMICON dealers in Beijing. The China Times (the largest newspaper in Taiwan) is also an investor.

Japan - Cement consumption has fluctuated between 65 and 85 million tons per year since 1972.

Japan is essentially self sufficient, with production exceeding consumption by up to 15 million tons/year (however they also import up to 4 million tons yearly). Onoda is the largest producer with 24% market share, while the 5 largest firms achieve 70% share. Capacity utilization is high at 97%. Export is expected to continue due to stagnant domestic demand and strong demand from Southeast Asian countries.

TY has a subsidiary in Japan, and this country has been a primary export market for TY to

date. TY would like to strengthen this export market and form strategic alliances with Japanese manufacturers for international marketing, as it views the Japanese firms as having strong competitive capabilities in both technology and financial resources.

Indonesia - Demand for cement has grown at a rate of 13% since 1990, but remains at a

relatively low per capita level. The government has prepared an aggressive investment plan to develop infrastructure, and forecasts continued economic growth at 6% and growth in demand for cement at 8-10%.

Limestone reserves are plentiful. Governmental influence is strong, as the nine current

producers are at least partially owned or managed by the government, and regulations restrict prices, exports, imports, and market allocations. There are plans to increase capacity to 34 million tons by 1998. Foreign investors are encouraged to form joint ventures with local firms.

Local firms are viewed as weaker in technical and financial resources, and accordingly,

contractual arrangements or joint ventures are viewed as attractive for TY, while foreign direct investment is likely restricted.

Malaysia - Malaysia’s economy is experiencing rapid growth, and governmental investment in

infrastructure is high. Over the past five years, cement consumption has doubled, and is projected to be 14-16 million tons in the year 2000. Roughly 2 million tons of clinker are currently imported. However, expansion is underway such that there may be a net surplus by 1998.


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Competition appears to be stiff, with both local competitors and Japanese companies vying for position. Governmental regulation appears minimal, although there have been price controls. The appropriate strategy for TY may be to export to Malaysia, rather than pursue investment of contractual arrangement, due to the competitive environment.

TY reported has begun working on a contractual agreement for installation of a plant to the

North of Kuala Lumpur. Philippines - Demand has increased by 8.5% per year over the past 5 years due to a construction

boom in Manila (where 60% of product is consumed), with a shortage of product, since capacity increased by a lesser 8.3%. Forecasts suggest the economic and construction growth rate will continue at 6-7%, with per capita consumption increasing to 250 kg in 1998.

Transportation infrastructure is lacking (particularly harbor facilities). Three large

manufacturers hold 79% market share, but in general, facilities are old and energy resources are lacking (coal and electricity). Plans exist to increase capacity to 16 million tons in the late 1990s, but fall short of hitting expected demand. Japanese cement manufacturers are actively pursuing joint ventures, which the government encourages (foreign direct investment is discouraged). The government has encouraged Korean firms to pursue similar joint ventures.

TY has initiated its involvement in the Philippine market, participating in the one million ton

capacity expansion of FR Cement, a member of Araneta Group, and obtaining 6% ownership. North Korea - North Korea’s economy shrunk by 5% per year between 1987 and 1993, and is

unpredictable. Consumption has been relatively steady at 5 million tons/year, about 1/10 of South Korea’s level (although population is nearly 1/2). Capacity is 12 million tons/year, primarily from 4 factories, with 1 million tons/year of export.

The North Korean market would be viewed as a lucrative opportunity to TY should an

acceptable political climate develop. TY considers that the market would be receptive to their technical competence and financial resources. The possibility of developing North Korea’s western limestone deposits would give such a facility a geographic advantage, as there are currently no plants near Seoul.

Vietnam - With Vietnam now recovering from the war, 9-12% growth of the economy is

projected (real GDP has grown by 7-10% since 1990). Transportation and other infrastructure investments are being pursued, and cement demand is forecast to be 10 million tons in 1997 and 20 million tons in 2000. Limestone and coal reserves are available.

The government controls the industry, currently consisting of 5 large factories and numerous

small ones producing low quality cement. Upgrading and expansion are planned, and joint ventures with foreign investors are encouraged (foreign direct investment is prohibited).

TY views itself as having competitive advantage over local producers with opportunities for

export, joint venture, or contractual arrangement. However, other competitive firms from Japan and elsewhere see similar opportunities.


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Singapore - No limestone is found in Singapore, and accordingly, clinker are imported to meet cement demand that has grown to 3.7 million tons in 1993. The country experienced 8-36% economic growth in 1991-1994.

Governmental regulation is not a factor. However, existing competitors in the milling

business are well entrenched and technically competent, such that TY views its potential role as being an exporter of clinker or cement to Singapore.

Hong Kong - Consumption of cement has been relatively flat over the past 10 years in spite of

growth of the GNP by 2.3% to 13.5%. There are no domestic limestone reserves, however there are cement plants using imports of clinker. Imports come primarily from Japan and Korea.

Governmental influence is not a factor currently, however Hong Kong is scheduled to be

returned to China in 1997. TY views export of clinker in the short term, and export of cement from TY investments in China in the longer term, as possible strategies.

Myanmar - Political factors (namely, a coup d’état in the late 1980s) have been blamed for

economic recession and low productivity. More recently, announced plans for infrastructure development have buoyed economic optimism.

Limestone deposits total 160 million tons, but current facilities need modernization and

expansion to meet demand. The competitive advantage of TY is accordingly strong, and foreign direct investment is encouraged. The upside potential for demand is great, but infrastructure is lacking as are developed energy sources. These factors, along with the political climate, make investment risky.

Summary As Mr. Hyun reviewed the Planning Department’s report, he reflected on how far the TY Cement Corporation had progressed. It was just 40 years ago that its founder, Mr. Yang Koo Lee, first purchased the Samchok cement plant with the small “fortune” he had made selling cookies. Now, Tong Yang was positioning itself to be a mjor player in the International market by developing a strategy for globalizing its business.


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Appendix I: Financial Information for Tong Yang Cement (won3 in billions. For year end Dec 31.)

1993 1994 Sales 560.6 580.4 Cost of sales 407.5 459.7 Selling, gen. & admin. 87.2 66.7 Operating Income 65.9 53.9 Interest & other expense 39.4 28.6 Taxes 8.0 7.2 Net Income 26.6 25.3 Earnings per share 1,853 1,771 Consolidated Balance Sheet (Dec. 31) 1993 1994 Assets Current Assets Cash, bank deposits, &

marketable securities 111 111

Accounts receivable, net 130 136 Inventories 47 50 Other 19 40 Total current assets 297 337 Investments 101 162 Plant, prop. & equip, net 724 794 Other assets, net 70 73 Total assets 1,191 1,366 Liabilities & Stockholders’ Equity Current liabilities Short-term borrowings 161 122 Accounts payable 30 48 Income taxes payable 3 3 Accrued liabilities 33 32 Other current liabilities 68 142 Total current liabilities 296 347 Long-term debt & other

obligations 519 627

Stockholders’ equity 377 392 Total liabilities & stockholders’

equity 1,191 1,366

3 The exchange rate as of the date of the case was roughly 780 won/$ US.


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Appendix II. Yearly Per-capita Cement Consumption by Country

0

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1,000

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1,400

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

kg (

000)

Japan

U.S.

U.K.

Korea

Korea Japan U.S. U.K. Korea Japan U.S. U.K. Korea Japan U.S. U.K. 1951 1 64 265 172 1966 66 358 329 309 1981 321 662 289 2201952 2 71 263 181 1967 93 397 318 320 1982 364 617 256 2281953 5 91 279 174 1968 107 443 327 326 1983 442 591 292 2401954 4 110 279 203 1969 138 472 336 314 1984 458 589 326 2451955 5 104 305 210 1970 167 525 325 308 1985 465 561 332 2421956 3 120 318 220 1971 187 541 341 316 1986 495 567 341 2441957 13 141 293 206 1972 170 608 350 322 1987 547 583 349 2651958 24 144 301 203 1973 212 715 388 356 1988 624 632 340 3111959 19 170 324 228 1974 221 638 351 314 1989 666 639 331 3191960 21 221 299 242 1975 239 567 294 300 1990 792 681 324 2821961 22 239 298 264 1976 253 572 309 277 1991 1,023 698 284 2421962 38 280 306 263 1977 305 609 336 258 1992 1,070 666 298 2071963 40 287 315 261 1978 399 689 357 265 1993 1,059 634 308 2061964 42 316 323 315 1979 422 706 354 271 1994 1,168 6371965 52 310 325 312 1980 346 706 309 254 1995 1,222 633


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Appendix III - Sites Pertinent to TY’s Globalization Strategy

Ho Chi Minh City, Vietnam

Pukpyong, Korea

Taipei, Taiwan

Hong Kong

Pyongyang, N. Korea

Tokyo, Japan

Manila, PhilippinesRangoon,

Myanmar (Burma)

Bangkok, Thailand

Kuala Lumpur, Malaysia

Singapore

Jakarta, Indonesia

Beijing, China

Shanghai, China

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