Following flatlining demand growth in FY 20, the impact of Covid-19 is expected to see cement demand contract by anywhere between 10 to 25 per cent according to the latest estimates by CRISIL.
The spread of the coronavirus pandemic and the resulting lockdown across India has created an unparalleled crisis for the Indian cement industry. Manufacturing has been severely disrupted by restrictions on plant operations and the movement of labour, while the suspension of construction activity and the closure of the retail channel has resulted in a precipitous collapse in demand.
Following flatlining demand growth in FY 20, the impact of Covid-19 is expected to see cement demand contract by anywhere between 10 to 25 per cent according to the latest estimates by CRISIL ‘ depending on when and how the Government lockdown eases. This could result in capacity utilisation falling from an estimated 65 to 67 per cent in FY20 to 56 to 58 per cent in FY21. Further, given the high degree of uncertainty about how the pandemic and its economic consequences will unfold, such projections could be subject to major revisions as we progress through the crisis. Given the scale and scope of Covid-19’s impact on the Indian cement industry, executives can be forgiven for feeling overwhelmed. However, by thinking and acting along three time horizons concurrently, it is possible for industry leaders to take steps to mitigate the impact of the lockdown, get their organisations back to work, and build a road to resurgence. By adopting this framework to manage through the crisis, leaders can break down the challenge into more manageable chunks and deploy dedicated organisational resources to tackle them in tandem.
Manage the lockdown
The current lockdown in place across large parts of the country has put severe restrictions on cement plant operations, supply chain logistics and the availability of labour. With the Covid-19 case count rising in many districts, cement companies will have to confront a geographic patchwork of restrictions and stop-start relaxations across their operational footprint. At the same time, cement companies have had to transition overnight from fairly traditional workplace practices to large-scale work from home, creating both technological and cultural hurdles to effective collaboration. In stark contrast to service industries, labour and capital intensive sectors like cement involve high-touch activity during manufacturing, transportation and sale of goods which makes maintaining physical distancing rules a particular challenge.
To manage the business during the lockdown cement companies should first ensure they have put in place an effective Covid-19 team. Within this team one task force should be designated with responsibility for crisis management and business continuity and should comprise leaders from supply chain, production, IT, HR, and government liaison. The priorities for this team should be ensuring the safety of employees and customers, defining and maintaining the minimum viable operation, coordinating with local authorities to ensure compliance and easing of emerging bottlenecks, and making work from home as productive as possible.
Building organisational resilience during this period is key. For example, cement supply chains will need to shift from previous focus on optimisation toward maximum resilience, as issues like inter-state transport bans disrupt previous patterns of movement for both inputs and finished goods. Using tools like visual dashboards can provide companies with a clearer picture of operational status and respond dynamically to changing on-ground situations.
Get back to work
As the lockdown eases, cement companies will be able to run at an increased level of operation but this will not be a return to the way things were. With the Coronavirus likely to persist throughout 2020 and probably beyond, companies will need to adapt to a new normal. Physical distancing rules will need to be maintained, resurgences of the virus may lead to a re-introduction of restrictions, and cement demand will remain below potential as the economic impact of the crisis plays out. Indian cement companies need to start preparing to cross this coming chasm today.
To think and act along this time horizon, a second task force of the Covid-team needs to focus on reviving revenue and ensuring cash conservation. This challenge will require major inputs from sales & marketing, finance, manufacturing and supply chain to help adapt the business model to the new operating climate.
The lockdown and ensuing economic slowdown will lead to acceleration of some earlier demand trends as well as emerging new trends. After years of sluggish growth, construction in the residential real estate sector will likely further retrench as consumer demand for new housing falls. In addition, the commercial real estate market which was an earlier bright spot, is expected to contract sharply. Therefore cement demand is likely to become more dependent on government spending on infrastructure and affordable housing. Demand may also shift geographically away from harder hit urban areas to rural regions where restrictions on activity may be more limited.
As well as identifying and targeting the most attractive customer segments during this period, cement companies will also need to track and tap into emerging trends in construction practices. One leading Indian cement company expects the combination of scarce labour availability in urban areas and the need for physical distancing to accelerate the demand for ready-mix-concrete (RMC). Companies may need to fast-track existing plans or pivot to new opportunities to revive revenues in the coming quarters.
Finally, in light of lower cement demand, companies will also need to review their capital investment and market entry decisions. Many Indian cement companies had earmarked substantial investments for new plant as well as entry into new geographies. Those plans will need to be urgently revisited given lower expected capacity utilisation at existing operations over the next year.
Build a new road to resurgence
Although a post-Covid landscape may seem far away today, cement companies need to start thinking about the new world that will emerge once the pandemic abates – and the challenges and opportunities that will come with it. Cement companies will emerge from the crisis to face a very different scenario in terms of the competitive landscape, customer behaviour, and employee mindset.
The fundamental shifts that Coronavirus will bring about require the focus of a dedicated team within the Covid-19 task force charged with thinking along a longer time frame and building a new road to resurgence. This requires a team with an aptitude for visioning, strategic insight and large-scale change management. Topics such as digitalisation, technological and product innovation, sustainability, and cultural transformation will come to the fore as cement companies look to reimagine their business models for a new world. By thinking and acting concurrently along these three time horizons and committing dedicated resources to each of them. Indian cement companies can mitigate the impact of the current lockdown, revive revenues in the coming quarters and chart a new path to sustainable success in the post-Covid world.
ABOUT THE AUTHORS:
Deepak Sharma is Director of Strategy at Kanvic Consulting. His advice is sought by Fortune 500 companies, large owner managed and multi national companies looking to tap growth opportunities and tackle the most complex strategic challenges. He can be reached at deepak@kanvic.com
Shiv Sharma is an Associate Principal at Kanvic Consulting. He works in Kanvic’s strategy team in Gurgaon and manages client engagements across industrial and consumer sectors in the areas of strategy, marketing, sales and organisation. He can be reached at shiv@kanvic.com
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