Dangote Cement: A Story of Market Dominance
How did Dangote Cement, in just over a decade, cement its position as the dominant player on the Nigeria and the Continent?
Company and Industry Background
Dangote Cement (DC) is ~$25bn market cap. company and is the largest cement producer in Africa with revenues of ~$ 2.0billion in 2014 and 43.3 mn tpa of cement production capacity. Founded in by Aliko Dangote, (67th on the Forbes Rich List), DC has grown from being a single country business to one with operations across 13 countries on the Continent.
(see page 10 of http://dangcem.com/documentdownloads/Dangote%20Cement%20Q3%202015%20results%20presentation.pdf for breakdown of operations).
Since 2012, DC has spent +$5bn on its expansion drive in Africa and has recently announced an aggressive growth plan to achieve a production capacity of 72.7 mn tpa by 2018. Nevertheless, it’s growth engine and competitive advantage still lies in its Nigerian operations (29.5 mn tpa) – that will be the focus of this post.
Initially beginning operations as an importer of bagged cement, DC took advantaged of the Nigerian Government’s 2002 Industrial policy of backward integration and transitioned from solely being an importer of bagged cement to the dominant cement player in Nigeria. With 3 plants in the Country, DC holds a 78% market share (based on capacity) and has seen its Nigerian revenues grow from ~$1.2bn in 2011 to ~$1.9bn to in 2014. Remarkably, its EBITDA margin has average 60% during that period. In comparison, its closest peer, Lafarge WAPCO enjoys a 35% EBITDA margin and a 12% market share.
Business and Operating Model
With a population of 170m people, a housing deficit for 17m and a per capita cement production of 122kg (versus the global average of 513kg), long term prospects for Nigerian cement market are attractive. With this backdrop, DC strategically sought to position itself as lowest cost provider of high quality cement. (See below chart for cash cost comparison with its key competitor)
In the past, Nigeria had imported relatively low quality cement at high prices as such, DC sought to create value for its customers by emphasizing its high quality, value-for-money proposition that was premised on strong integration between its business and operational models. Some of the key features of this model included:
- Location: DC strategically located its plants close to its owned significant limestone deposits (also a significant operational benefit as it reduced raw material and end-product transportation costs) and to areas of urban population and cement demand
- Relatively inexpensive, modern machinery and construction costs by leveraging on close relationships with Chinese suppliers. Recently agreed upon a $4.3bn deal with Sinoma of China to construct new plants across Africa. Nevertheless, each world-scale plant costs ~$500m and has a development lead time of at least 5 years – significant barriers to entry for would be competitors
- Extensive distribution network: Given the scale of the Country, DC has built a fleet of over 4658 trucks to deliver to its key clients. It has also developed strategic relationships with distributors and depot owners across the Country
- Lower Energy Costs: Fuel and power represent over 1/3 of total cash costs. Historically, its plants had relied upon imported and expensive Low pour fuel oil (LPFO) as its main fuel source but DC has secured cheaper gas as it fuel for a number of its plants (4x cheaper than LPFO).
- Leveraged indigenous status:
- As the only indigenous producer of note, DC has taken advantage of this position by building strong, strategic relationships with larger Nigerian offtakers – such as Julius Berger (Nigeria’s largest construction company)
- It has been at the forefront of emphasizing the benefits of a higher quality grade of cement – 42.5 grade and was a significant winner when the cement regulators imposed a new policy on cement, which restricted the use of the 32.5 and urged manufacturers to begin production of the high-grade 42.5. Its plants had the operational flexibility to produce this grade, whereas Lafarge would have to retool some of its facilities to meet the grade.
The deliberate and aggressive execution of the simple business model through the strategic locating of large, low cost plants and by leveraging its strong local relationships has resulted in the dominant position that DC sees itself in. It is hard to see it relinquishing its position anytime soon in Nigeria. The question now is – can it successfully replicate its model across the Continent?
References
http://dangcem.com/
http://www.bbc.com/news/business-34067963
Renaissance Capital Research Reports
http://www.cemweek.com/
Very interesting post Oba! Dangote Cement’s story reminded me quite a bit of the BYD case we read in TOM earlier this semester. Like BYD much of Dangote Cement’s operational prowess appears to stem from geographic peculiarities (e.g., strength of relationship with leading upstream player, Julius Berger, strategic connections with distributors, advantageous energy costs, and proximity of its factories to lime deposits). Do you think that Dangote will be able to sustain such high margins as it expands outside of Nigeria? Also, does the company have any plans for vertical integration, perhaps entering the construction industry as BYD entered the automobile industry?
Great post to illuminate how one player can capitalize on operational opportunities to develop a strategy to help the local population while still capturing value. Does Dangote Cement have the ability to extract from limestone deposits in nearby countries as it expands across the continent? Do the areas of potential expansion have significant deposits to satisfy local demands? Will Dangote Cement be able to achieve the same positive image with respect to local populations and governments.
I definitely find it interesting that they have been able to lower costs by forging alliances with Chinese providers and creative energy sourcing. Will those opportunities exist going into other countries? Have their been any competitors in nearby countries who could replicate their model but use their personal relationships within their countries to beat Dangote at their own strategy?
Good insight into how Dangote Cement has strategically positioned itself within the market to compete on both cost and quality metrics. As DC begins to migrate outside of the Nigerian borders to other African countries – Ethiopia, for instance – I wonder how much of their competitive edge they will be able to leverage. While DC is firmly positioned as an “indigenous” in Nigeria, I could see how this would be a running risk upon expansion. For one, similar regulations of favorability towards local firms could be adopted in the nations they begin to operate in. Secondly, I could see how local business man/women in other nations may be able to leverage their in-country relationships and knowledge of cultural context to gain a competitive. The 5 year lead time for getting a cement factory up and running leaves a large window of opportunity for competitors to gain a competitive advantage in these other markets.
Fantastic article! great to see how Dangote went from a mere importer to an integrated producer/ distributor. The following are my questions:
1) How much of its higher profit margins are attributable to the Nigerian Government’s 2002 Industrial policy of backward integration? What kind does this program provide them and what prevents other players from receiving similar incentives?
2) I see that the revenue growth of Dangote over the last year has been 9.69% as compared to 106.29% for Lafrage. Any ideas on how Lafrage is expanding so much faster? I don’t see how it can capture market share from Dangote given superior product and better prices. Any ideas? Is it leveraging 1st mover advantage to other geographies?
Hey Oba – what do you think would happen to market share if the government removed the ban on cement imports? Seems like the local price is significantly higher than it should be. Do you think the government will move away from protectionism any time soon?
Tariq