Cemex: Understanding Culture & Tradition as a Strategy

 

For those of you born in the 60s to 80s and living in Nairobi, going to shagz (rural homes) was somewhat a part of our calendar year activities and our parents always insisted we accompany them ‘home’.  Long weekends and the festive season were appropriate for such trips. Whereas we were used to living in well built houses in the cities or towns, electricity supply and water supply, shagz was a different prospect altogether. In those days a cement or brick house was the stuff of dreams and indeed a sign of affluence. Electricity and water supply? unheard of. The quickest and most affordable means to build shelter was mud, poles cut from trees to act as the frame and support and thatched grass. You then proceeded to build the house yourself with the help of your family and neighbouring relatives. Your house was complete.

Today, a lot has indeed changed since then; more and more people are building cement houses too. However, majority of the people still live in mud houses in the rural areas. Houses and schools built using cement are in some parts of Kenyan unheard of let alone unseen. A major reason for this is that cement as a building component is not affordable to most of them when purchased in large quantities. Labour is also costly and who needs labour when you can do it yourself. Surprisingly, this is a scenario that isn’t unique to developing Kenya but also developing Mexico.

In Mexico, most families live in overcrowded houses as the cost of building additional houses or rooms for family members is high. Just like most of rural Kenya, Mexicans are a very traditional people. A significant portion of their extra money is spent on festivals and ceremonies. These events are unavoidable to the Mexican budget. For them cement is a luxury. Rather than cement houses being a source of pride and emotion, for them it just meant an additional cost. As a result, most of Mexico’s poor had insufficient and inconsistent savings to purchase building materials, even though having a cement house was a lifetime dream. So how do you sell cement to willing buyers who have low incomes and no access to credit?

In Mexico, this is the problem that faced CEMEX, the world third largest cement producer. CEMEX conservatively estimated that this market could grow to be worth $500(Ksh 40b) million to $600(50b) million annually if it could unlock this latent demand. To solve this market puzzle, CEMEX launched a community program dubbed Patrimonio Hoy (Property Now) that improved on an already existing community saving scheme in the Mexican community, tandas. In a tanda, ten individuals (for example) contribute 100(Ksh800) pesos per week for ten weeks. In the first week, lots are drawn to see who “wins” the 1,000 pesos ($90) in each of the ten weeks. All participants win the 1,000 pesos one time only, but when they win, they receive a large amount to make a large purchase. In traditional tandas the “winning” family would spend the windfall on an important festive or religious event such as a baptism or marriage. In the Patrimonio Hoy, however, the proceeds are directed toward building room additions and houses with cement. CEMEX enlisted these participants of Patrimonio Hoy as members of a collateral free micro-financing system.

Naturally what followed was the need for technical expertise which was sorely lacking in these communities. This led to many construction projects being started but never completed or being of very low quality. CEMEX  went ahead to provide free engineering and architectural expertise as part of the membership.

The unique aspect of CEMEX’s strategy was that it managed to combine a basic human aspiration (building/owning a house) with an age old tradition( the tandas). Through this revolutionary innovation CEMEX was able to enlarge its market and build customer loyalty by shifting the orientation of its industry from a functional product into an emotional one. This also lowered CEMEX’s inventory costs, led to smoother production runs and guaranteed sales that lowered the cost of capital. This programme has also been rolled out to other parts of South America including Colombia, Costa Rica, Nicaragua and the Dominican Republic.

By understanding their potential consumers and their traditions, CEMEX helped the poor help themselves. In return, they reaped enormous profits. Cement producers in Kenya and Africa could learn a thing or two from CEMEX about competitive strategy after all. Think about it……what if every Kenyan in rural Kenya or even in city slums slept in a cement room/house every night? Now isn’t that the stuff of dreams?

Charles Darwin & the Investment Club

A theory of biological evolution developed by Charles Darwin and others, states that all species of organisms arise and develop through the natural selection of small, inherited variations that increase the individual’s ability to compete, survive, and reproduce. It is also appropriately called the Darwinian Theory. It is a theory that divides opinion to date. Scientists lean towards it but religious leaders and their folk are against it. But in finding middle ground, we must all agree that evolution breeds competition, survival and reproduction.

In early 1998 a group of retired, middle aged women with their various sources of capital – savings and lump sums decide to form a group. Their primary goal? to save money and invest in ‘safe’ ventures so as to gain and not lose their money during their sunset years what is primarily known in financial circles as capital retention; and after the gains? As one of the members put it “tukule mandazi” (let’s eat doughnuts), an expression that meant they will enjoy their gains but keep the capital. They achieved their goals through simplicity. Members met in each others’ houses every month on weekends and discussed over lunch or 4 pm tea. Minutes would be taken and voting on major issues would be carried out. They made monthly contributions that were recorded on hardcover books through manual spreadsheets. Internal lending was created for members to borrow in times of need and return back the funds with ‘interest’ (a measly percentage that was their own way of unknowingly fighting inflation and preserving their net worth). So for these wise women survival was the goal. Later on, they would get involved in the capital markets in search of better gains. This year, this investment club turns 15 years old and is still going strong. I’m proud to say one of those wise women is my mother.

Fast forward to today and one of Kenya’s greatest investment club stories is listed on the Nairobi Securities Exchange. As investments folklore go, TransCentury Limited was conceived in one of the golf courses in Nairobi in 1995. Just like the wise women they had their individual sums and put their resources together. The difference lie in the type of investments they made. This time the  types of investments required investment professionals and their advice. Aside from the ‘safe’ ventures, investing in companie,s public and private was also considered as they developed. Risk was a consideration and unlike the wise women they consciously sought to fight inflation through complex financial models and analysis.  Because of the high risk involved they also seek high returns. Highly technical terms such as IRR (Internal Rate of Return), Net Present Value(NPV), while uncommon to the wise women are the jargon in such professionally run groups and companies

Today, Transcentury is a full-fledged holding company that has interests in energy, transport and infrastructure. It is run by a highly educated and experienced management team and a board full of business experience that steers the long term vision of the company. For Transcentury, they have evolved from their own initial goals of survival to being able to compete in the investment space, while their high returns during exits literally characterize Darwin’s assertion of reproduction.

From being called merry-go-rounds to investment groups/clubs/chamas? What next for these entities? Maybe more listings in the stock market? Private investments on a continental scale while searching for value? Mergers with other similar entities to create investment giants? Who knows? One thing is for sure though – Had Darwin’s theory applied to investment clubs, everybody would be in agreement.

Join the conversation, tell me your investment club stories…………………..Cheers!

Welcome

Africa has seen its fair share of growth over the years and now we are beginning to see the effects with infrastructure, financial institutions and small business being the biggest beneficiaries. The ‘Dark’ continent is slowly turning the corner and a light is beginning to shine. An analysis by The Economist finds that over the ten years to 2010, six of the world’s ten fastest-growing economies were in sub-Saharan Africa. Over the next five years Africa is likely to take the lead. In other words, the average African economy will outpace its Asian counterpart. The frontier market will soon be the emerging market.

In Kenya, for example recent events have seen private equity funds compete fiercely in search of value. Commercial banks are seeing phenomenal growth and fears of a real estate bubble are abound. The stock market is slowly growing but investors just as in other countries in the continent feel that they are held ransom by political events and structures. Yet value is being created and growth is being achieved.

How is all this being done & how can it be made better? Join the conversation, tell me your stories ………..Cheers!