Securing success in Southeast Asia

Sayak Datta, Partner at Roland Berger joins the World Cement Podcast to dive into the details of a recent report highlighting five must-win themes for Southeast Asian cement producers – covering everything from sales to sustainability.

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Creators and Guests

Host

David Bizley

As well as the day-to-day editing of content and working with article authors and advertisers, he is actively involved in the commissioning of material for both the magazine and its expanding online presence.

Guest

Sayak Datta

Partner at Roland Berger

What is World Cement Podcast?

The World Cement podcast: a podcast series for professionals in the cement industry.

David Bizley: 00:02

Hello, and welcome back to the World Cement Podcast with me, your host, David Bisley, senior editor of World Cement. In this episode, I'm joined by Sayak , partner at Roland Berger, and we're going to be heading over to Southeast Asia to explore the state of the cement industry there and highlight some key themes for success for operators in Norwegian. I just wanted to take a moment to remind you to register for WorldCement. It's free of charge and gives you access to the latest issues of WorldCement, both in print and online. Every issue comes packed full of regional analysis, technical articles, project case studies, and the latest industry news.

David Bizley: 00:45

Simply head over to worldcement.com, click the magazine tab, and register today. It's as simple as that. Happy reading! Sajak, delighted to have you with us. Welcome to the World Cement Podcast.

Sayak Datta: 00:59

Thank you, David. Delighted to be here as well, and I'm looking forward to our session today.

David Bizley: 01:04

Excellent. As always, before we get into the big issues, we'd like to begin with a little bit of an introduction. So please tell us a bit about Roland Burger and what it is that you guys do Roland

Sayak Datta: 01:15

Burger is a global management consulting firm We are in fact the only consulting firm that is of European origin so we started out of Germany, grew in Europe and now all across the world we serve clients across different industries one of which happens to be the industrial sector and in particular cement I am focused on the industrials and energy sector based out of Singapore and serving the clients in this region here.

David Bizley: 01:43

Okay. And you released a report earlier this year entitled Cementing Your Position in Cement, five Must Win Themes for Southeast Asia. Now, Before we get into that report and the themes you covered, tell us a bit about the status of the Southeast Asian cement industry. What's the current prognosis?

Sayak Datta: 02:01

First of all, if you look at the cement industry, Southeast Asia accounts for around 7% cement production globally The key countries include Vietnam, Indonesia, Thailand, and Malaysia In the last few years, domestic demand across these countries has reduced significantly so just to show some numbers demand increased at around 2% year on year basis between 2016 and 2019 but then when you look at twenty nineteen-twenty twenty three timeframe it remained pretty much stagnant given the fact that you cannot build cement plants in a few months it takes years of planning a lot of capacity came in online expecting demand for cement across these countries to increase what happened once the demand slowed down is there has been a sustained underutilization for cement plants across Southeast Asian countries utilization levels have been hovering around fifty-sixty percent if I factor in only the domestic demand for each of the key countries and that's really been at the core of why this industry has suffered let alone China construction is slowing down and therefore a lot of the Chinese players have typically wanted to flow their products into Southeast Asian regions, so overcapacity has been a key problem.

David Bizley: 03:28

Looking then at the themes covered by your report, the first one you brought up was diversifying revenue streams. What do you think are the most promising non core revenue streams for cement producers in Southeast Asia?

Sayak Datta: 03:41

If I look at the diversification aspect, there are a few areas one could look into one) adjacencies across the cement value chain itself two) new building materials three) services The last one, and we can come to that later, would be export markets If I dig a little bit expansion across the cement value chain implies that companies move more into the raw material side of cement production as well as into the logistics side of the business As you may be familiar, cement requires a lot of raw materials taking strategic positions into that would mean that you have not only supply security but additional streams of revenue for example chemical additives aggregates, limestone dolomite and you can complement that alongside cement with getting into the different types of concrete for example advanced aerated concrete, ready mix products and logistics services two. New building materials So if you look at many of the global cement companies they have evolved from being just a cement player to a building materials player and now actually into a building materials and services player so here I'm talking about getting into new products like mortar, glass, ceramics, thermal insulation and what not and then also services would mean getting into construction services, waste management all in all, expansion along the value chain and then new building materials and services would be key areas for cement companies to explore in Southeast Asia.

David Bizley: 05:34

You mentioned in the report as well, in addition to new products and services of the kind you've mentioned, revenue diversification can also be understood on a geographical basis, I. E. Finding new customers elsewhere. Now that approach comes with risks of its own, geopolitical issues and things like carbon border tariffs and so on. How can producers best mitigate these kinds of risks?

Sayak Datta: 05:56

That is a very interesting question. Export markets very right now. We have seen a lot of discussions on tariffs in the last several months and therefore whether it's tariffs, whether it's carbon border mechanisms players will need to make sure that they have domestic demand which would be the core part of the demand for the companies Beyond that, they would have to look into export markets even if it is on a short or mid term basis and here what players would need to do is to look at how they can secure longer term contracts To put things into perspective, in Southeast Asia countries like The Philippines and Bangladesh import cement and a lot of it comes from Vietnam but with this whole tariff saga that continues to play out we are also seeing a lot of protectionism even in Southeast Asian countries For example, The Philippines is also considering putting tariffs on cement imports from Vietnam Therefore, think a lot has changed and continues to change in these times and therefore, I feel that yes, exports could be looked at as a one off or a mid term short term basis However, the key thing would be to make sure that one has demand from the local markets where they are playing.

David Bizley: 07:20

Moving on then, must win theme number two is revitalizing business resilience through cost leadership. Your report shows that fuel, electricity and raw materials can account for as much as 70% of the costs based by producers in Southeast Asia. What are the key cost reduction levers that producers can take advantage of to get that cost percentage down?

Sayak Datta: 07:43

Sure, you look at the status of the industry that I mentioned earlier, what really has happened is many of the cement players in Southeast Asia have come under financial pressure, and just looking at the top line revenue side of things is not enough, and therefore focusing on reducing costs and as we mentioned we also highlight in the report some of the key areas or drivers of cost need to be addressed What we see there are basically eye believers for optimization of costs First one is basically network optimization So cement is produced in a particular factory, then maybe grinded and then goes through a packing and then it is eventually shipped to the customer in a simplified flow process So, how do you lay out your footprint so that you actually end up achieving the least cost to serve as you go to the end customer? Becomes an important one. Making sure that you have the lowest or least optimal network cost labor productivity etc. Mode mix How are you shipping your cement to your customers What is the piece size, mix? What is the logistics scheduling and operational efficiency for your cement to reach your customers?

Sayak Datta: 09:21

Four) Sourcing procurement third party spend optimization comes in whether it is for coal, raw materials, packaging our experience shows that there can be a lot of value in driving through procurement excellence The last one would be in terms of SG and A levers such as workload reduction and process optimization In a nutshell, if you look at these five areas, you can tackle all the major cost drivers for typical cement operations.

David Bizley: 09:54

So there's a range of approaches that producers can take then? Absolutely. Taking now a look at theme three: pursuing sales and marketing leadership for cement and beyond. How important is it to modernize retail channels and digital sales in what is a largely commoditized sector like cement? Are there examples that producers in Southeast Asia can learn from?

Sayak Datta: 10:19

Certainly! Is an interesting one. Cement is a commodity and therefore traditionally a lot of people have not looked at sales and marketing as an important lever, but more so now globally as well as in Southeast Asia we see this theme gaining prominence I'll highlight two key things: one) Modern retail stores where companies are basically setting up a shop that provides different kinds of building materials and services You see the examples of global cement players like Wholesym and Cemex getting invested into these kinds of sales and marketing excellence initiatives For example, Wholesym has established a strong retail network across the Latin American region through Dessensa, a company they have around 2,000 stores in South America offering a one stop shop for building materials The other example outside of modern retail stores is the proliferation of digital channels This is all about integrating online and in store connectivity Cement players are seeing that they can get direct access to customers through digital channels such as marketplaces and direct selling. Also closer to Southeast Asia we see Siam Cement Group which is one of the leading players or the leading cement player in Thailand also take up some initiatives such as launching a one stop shopping experience for their customers Their stores offer a range of products construction materials, interior design solutions all targeting the Thailand market and the key to that is making sure that they have the right partnership with different players so that they can actually offer the one stop shop that they are promising to the customer All in all, I would say that sales and marketing is gaining a lot of prominence We must remember that it's not only about cement, it's also about other products that are related to cement such as mortar and sales and marketing can actually be used to differentiate your products as compared to your competitors in this industry.

David Bizley: 12:26

Okay, excellent! Now, our next must win theme is taking a heightened stand on sustainability. So, in addition to the obvious benefits of operating in a more environmentally sustainable manner, your report also mentioned how investor pressure and increasingly stringent regulations are beginning to pose a risk to the competitiveness of cement producers in Southeast Asia. Can you give some examples of this in practice?

Sayak Datta: 12:53

Sure! Sustainability again is a very interesting theme and it often becomes a point of debate and contention especially in Southeast Asia because if you see the European markets behave very differently and the majority of the players in Southeast Asia as compared to those in Europe very different Having said that, signs of investor pressure on the cement sector too There are few examples banks excluding big cement players such as Kont Cement from their investor list and other examples of Southeast Asian cement players such as Siam City Cement getting excluded from some of the investor lists But then there is also another side of this coin. In fact, cement companies can also raise capital through sustainability linked financing. This is an example of a tool that companies can use to raise money thereby committing not only to sustainability but also to help their financial needs I'll give you an example: Cement Indonesia Group, which is the largest cement company in Indonesia, raised funds in 2022 through sustainability linked loans in Indonesia So therefore, while there is still a way to go, we are seeing increasing signs of investor pressure even in Southeast Asia and the cement sector as we speak.

David Bizley: 14:15

Sticking with this theme for a moment, the process of decarbonizing an industry like cement is obviously very complicated. What would you recommend as the first steps for producers looking to embark on that journey?

Sayak Datta: 14:27

I think the levers for achieving a net zero in cement and concrete are very well known and they are just a handful to put it out there there are savings in terms of clinker production there can be substitution there can be carbon capture there can be decarbonization of electricity that you are using to produce your cement efficiency in terms of concrete production and finally efficiency in terms of design and construction When it comes to cement players in Southeast Asia lowering their emissions we have to actually follow a practical approach because in Southeast Asia, in any of these countries here, we don't have carbon pricing as yet unlike India Therefore, the way we see the pathway for players to achieve lower emissions is first to make sure that you have targets set at the national, sectoral, and company levels with regard to emissions reduction from your cement sector it can be the overall industrial sector and then the cement sector and then focus on relatively more quick win initiatives These would include promotion of production of low clinker factor cement by we call SCMs and alternative clinker materials, for example hydraulic cement Alongside this, you can also get into other standardization of the definition of low carbon and concrete, making sure that there is transparency and alignment across the ecosystem, stimulating the demand for low carbon cement and concrete through state owned funded projects and then at a later stage focus more on the net zero aspect because to achieve net zero from this sector, only way to do that is actually carbon capture and to make sure that you can capture the carbon economically, you'll need a carbon price north of US120 dollars to US150 dollars per ton which we don't have in Southeast Asia and doesn't seem like you will end up in that stage the next couple of years Therefore, a practical approach towards ensuring whatever we can do now to lower the emissions from cement and concrete and then a longer time frame looking to the net zero aspect I think that would work for Southeast Asian players

David Bizley: 17:00

Sticking with the theme of sustainability for just a little bit longer and we did touch on this earlier as well How should exporters in Southeast Asia prepare for things like the EU's carbon border adjustment mechanism and similar measures that might emerge in other regions?

Sayak Datta: 17:15

Yeah. Think, again, given what we are hearing the last few months on tariffs, the world may be going towards more of protectionism than what we had thought a year back. Therefore, anything to do with export markets needs to be looked at very carefully. To your specific question, I think two things I would like to highlight here: First, any player that intends to export cement should look into the economics carefully by that what are the landed costs of my cement based on my cost of production, logistics, any kind of tariff, carbon adjustment, duties, etc. And therefore what is my landed cost and am I really going to be competitive in the export market that I have been targeting or intend to target and with this, what also needs to be thought through is how much carbon reduction do I need to have in terms of my cement or the product that I am exporting to make this really competitive in the export market?

Sayak Datta: 18:15

So that assessment of the landed costs has to be done very carefully and thinking through different scenarios becomes very important The other aspect is that players can look into producing different cement grades For example, in Thailand they are producing hydraulic cement which has a lower carbon footprint All in all, players can look into producing lower carbon grades of cement that could actually be exported to countries where there is a bit more sensitivity around the carbon footprint in the cement. These are factors that players will need to consider if they are serious about exporting into regions such as Europe or outside.

David Bizley: 18:58

Our fifth and final must win theme is exploiting AI and machine learning to turbocharge smart cement production What would you say are the most immediate and realistic AI use cases for cement producers today?

Sayak Datta: 19:12

Sure, AI has made a lot of impact in the last several years across different industries The event industry has been lagging a little bit but it's picking up as we speak and a lot of players globally are now getting very serious into the AI aspect and it can actually drive tremendous value and I'll highlight a few examples Safety is important in this business AI can help improve workforce safety Examples would be AI powered drones that can perform high risk inspections hazardous areas Beyond safety, are seeing more and more applications of AI into production and operational aspects in cement plants Fuel cost optimization: are different use cases we see CEMEX, Heidelberg Materials are using tools such as reinforcement learning to stabilize the combustion reducing the heat required this can end up generating savings for fuel one-three percent per ton of clinker So that's an area we are looking at with regard to fuel cost optimization Maintenance is another important area We see global players like Heidelberg, Semex, Ultratech applying machine learning for sensor based failure production and we see that five-ten percent reduction in unplanned downtime in cement plants can be achieved through AI applications Not only that, you can also reduce the maintenance costs by applying AI techniques And last, there are many other levers, but I would like to highlight one interesting area that we are also seeing is in terms AP and AR optimization so in terms of invoice processing, accounts payable and accounts receivable optimizations using AI you can actually reduce the AP processing time by around 50% which is quite significant More and more applications and use cases are coming into play even in the cement sector as we speak and I think this is another area where SE cement players can look at it a bit more seriously Of course, not every lever will work for every single company, so here comes the question: what would work and actually drive business sense in terms of applying AI into the cement operations or productions for a particular company.

David Bizley: 21:46

Okay, well thank you! We've covered a whole range of topics today everything from sales through to sustainability. Do you have any final thoughts for our audience?

Sayak Datta: 21:55

Well, terms of final thought, I would say as we were doing this study, one of the things that came to our mind is that cement and concrete have been around for many years and they are not going anywhere you will continue to require these basic building materials It is true that the Southeast Asia cement industry is at a pivotal point facing challenges from multiple angles that we talked about before While the challenge is big, believe that the opportunity is even bigger Southeast Asian cement players need to capitalize on this opportunity How do you explore new frontiers for business resilience? How do you differentiate from others? What can you do to enable climate change and increase the attractiveness of this business for the investor community? We firmly believe that the next five years will be very dynamic for the Southeast Asian cement industry and it will really come down to what choices the players eventually make Therefore, the vision and execution of that vision will help some cement players cement their position for a more resilient tomorrow. We really believe that the time to is now.

David Bizley: 23:04

For players who are willing to seize the opportunities, there's still a very optimistic outlook in that region?

Sayak Datta: 23:11

Absolutely.

David Bizley: 23:12

Okay, excellent. That is all the time we have for this episode. Sayak, thank you so much for joining us today and sharing your insights with us.

Sayak Datta: 23:18

Thank you so much, David. Appreciate it.

David Bizley: 23:22

And a big thank you to those in our audience for joining us once again as well. If you liked this episode, please make sure to rate and review, and subscribe if you haven't already done so. And don't forget to check out some of our other episodes too. Thanks everyone, goodbye for now. I just wanted to take a moment to remind you to register for WorldCement.

David Bizley: 23:47

It's free of charge and gives you access to the latest issues of World Cement, both in print and online. Every issue comes packed full of regional analysis, technical articles, project case studies, and the latest industry news. Simply head over to worldcement.com, click the Magazine tab, and register today. It's as simple as that. Happy reading!