Ready-mixed concrete offers solid opportunities for newcomers

Author:   Lalita Thienprasiddhi and Chakramon Nitibhon

Cement is not all created equal. Whereas traditional cement was first developed as a construction material in Mesopotamia some 5,000 years ago, ready-mixed concrete (RMC) is a modern innovation introduced in the early 20^th century. Today, RMC is predominant in the rich countries, and is fast becoming more popular in Thailand thanks to consistency, convenience and speed of application that are superior to traditional bulk cement. The nation's RMC industry is still at a somewhat early stage of development, and will expand considerably on the back of growth in the construction sector.

But any company that wants to capture RMC market opportunities needs to establish strong branding and reputation; to expand its network of distribution sites effectively through franchising, efficient logistics and strong management; and to establish reliable supplies of materials. The big incumbent cement makers already have these advantages, which limits the growth potential of smaller players aiming to sell RMC.

Yet Thailand's RMC market is sizeable already, and will grow substantially in the years ahead, given the ongoing expansion of residential estates and plans for numerous infrastructure projects. This creates new opportunities.  

RMC can be seen at construction sites all over the nation, wherever you notice mixing trucks, known as in-transit mixers, lining up to discharge their contents. The big spinning containers hold a customized mixture of water, cement and aggregates like sand, gravel and crushed stone - the ingredients of this building material. The mix is formulated to the specific needs of each project.

The EIC estimates that Thailand's RMC market grew at a compounded average annual rate of 7% during 2007-2012. But in 2012, the industry leaped 22% year-on-year (Figure 1).

An increase in big projects is spurring consumption of RMC because these structures require concrete that is of uniformly high quality and provided on a timely basis to meet the needs of technology like slip form construction, which creates very strong walls or foundations using a continuous flow of concrete. Use of mechanized approaches to construction is increasing due to labor shortages and pressure to speed project completions.

RMC is also advantageous because it is mixed off-site, so it's a better choice for projects where space is constrained, such as in cities. Mixing concrete off-site also allows for higher quality. Yet RMC costs more than traditional bulk cement. For instance, installing one cubic meter of concrete floor using RMC costs approximately 15% more than bulk cement mixed on-site.

Despite higher cost, RMC already dominates the market in developed countries. In Japan, for example, 72% of all cement produced is used for RMC. The ratio in Thailand stands at just 25%. Japan consumes around 0.71 cubic meter of RMC per capita, whereas consumption in Thailand is just 0.35 cubic meters.

Thailand's RMC consumption looks positioned to rise due to the positive outlook for growth in construction and GDP (Figure 2). Capacity utilization at the top RMC plants is still low compared to utilization rates of cement-making plants (Figure 1). This indicates that the industry has ample room to ramp up RMC production.

Small players can make RMC profitably, but the big bulk-cement companies are at an advantage. Thailand's RMC industry is more fragmented than the bulk-cement industry (Figure 3), where it is difficult to achieve the big economies of scale needed for profitability. Market share tells the story. The top three cement producers in Thailand (namely Siam Cement Group, Siam City Cement and TPI Polene) dominate 85% of the cement market, but they take only 61% of the RMC market (Figure 3). It's not so hard to achieve a profitable economy of scale in RMC, so smaller players can compete. Pure RMC players that do not have their own cement-making plants can even offer RMC.

But higher net profit margins show that that the large RMC producers with vertically integrated supply chains enjoy a competitive advantage over small players (Figure 4). The advantage results from securing more reliable supplies of materials; more efficient logistics; better management of site networks; better customer service; and stronger technology. These are the benefits of scale. And in terms of sales and marketing, the well-known RMC producers with strong brands serve as preferred vendors to large contractors, thus dominating the high-value project segment. Small RMC producers without brand recognition are forced to scramble for share among smaller projects.

The leading RMC producers are franchising to grow. The RMC business generates gross margin of around 13% on average (in 2012). The dominant players have continually achieved strong growth in this specialization. These big companies can expand either by themselves or through franchising, whereby the franchisee handles quality control, product customization and customer service. In Thailand, the franchising business model is widespread and has become a key expansion strategy for the top three players thanks to speed, lower upfront costs and the expertise of franchisees regarding local customers. Using this model, the top three integrated players have grown their core revenues at 8.5% per annum on average during 2007-2012, outpacing the 3.9% annual growth of pure RMC companies during that period. In particular, SCG's RMC revenue now contributes 47% of structural cement sales in Thailand as of 3Q 2013, or 16% of revenue earned from cement and building material business in ASEAN.

Aspiring players can still get into the market, but need to keep in mind that the first-mover advantage is important to success. Incumbent local players tend to have strong relationships with local contractors, helping them secure significant local market share. This creates a barrier to new entrants. This means that RMC producers should focus on high-potential markets characterized by large project investments, accelerating urbanization and rising household incomes.

An RMC company needs to have a network of plants if it wants to cover a large area because the product must be made near customers' construction sites. This is because RMC has has a low value-to-weight ratio and is highly perishable, with a standard shelf life of just 90 minutes. The RMC producer needs to distribute its products efficiently, coordinating delivery through central offices and call centers to ensure timely delivery. Service excellence is a major factor in winning and keeping customers. Sizeable investment is needed to establish and operate an RMC plant. The average upfront investment for newly registered RMC plants is around 21 million baht, as of May 2013. RMC operations are subject to strict environmental and industrial regulations, so the owner must install equipment like dust suppression systems. Factors like these are entry barriers that will challenge small RMC producers.

The RMC markets with highest potential are upcountry, especially in the northeast. Companies should target areas slated for infrastructure investments and real estate developments. The northeastern region, known as Isan, is expected to experience strong economic growth and urbanization, supported by rising incomes and commerce, new infrastructure, and expansion of industrial estates. Traditional retailers that have enough funding and skills should add RMC to their product portfolio. Local building material retailers who have land and capital can get into RMC, such as by purchasing franchises from integrated suppliers and other established players. This approach give the retailer access to know-how, a dependable product supply, a recognized brand name and established customer base, lowering the barriers to market entry compared to setting up a new RMC brand. Building materials players with good locations, existing clientele and distribution expertise can easily introduce RMC products  RMC producers having land plots near big construction sites will benefit. Players having strong relationships with contractors will be able to dominate local markets, shutting out newcomers. Companies with distribution know-how, such as building materials retailers, can introduce RMC as a complementary product, leveraging on their existing customer base and industry knowledge.