Leadership Spotlight

CEMEX: Credit and Concrete

Commercial credit historically has been unavailable to the very poor. Yet economists maintain that commercial credit is a central component of any market economy. Access to credit in the United States has allowed even people of modest means to make major purchases, including houses, cars and educations.

CEMEX, Mexico's largest cement manufacturer and the third-largest cement company in the world, is a technologically sophisticated firm with a competitive advantage derived from a distribution infrastructure that monitors the movement of every truck in real time to insure on-time delivery of cement. The company sells cement to two distinct markets: the construction industry and the "do-it-yourself" customer. During the Mexican economic crisis in 1994 and 1995, CEMEX found its sales to the construction industry tumbled as much as 50% while sales to the do-it-yourself market fell between 10% and 20%. It decided then to reduce its reliance on the cyclical construction industry by placing more emphasis on the do-it-yourself market. The company realized the key difference between the two markets was the average revenue per customer. Small but steady sales to individuals earning less than $5 a day could produce very impressive revenues.

Market research showed that most of the cement sales to the do-it-yourself market were for the construction of one room, either an addition to an existing structure or the start of what would eventually become a family's house. It was obvious that if potential do-it-yourself customers had access to credit, they could undertake construction sooner and more often than if they had to amass the entire purchase price of the cement at one time. In 1998 CEMEX launched an experimental program called Patrimonio Hoy—Savings/Property Today—intended to enable very poor people to pay for building materials and services to upgrade their homes.

The program initially targeted neighborhoods in which the average daily family income was about $5 to $15. Managers were sent into the neighborhood to enroll women—traditionally responsible for saving and purchasing within a Mexican household—in groups of three to form a "socio group." The three members of each group agree to take turns collecting small payments from each of the members that will be saved toward making cement purchases. Once the socio is formed, they are visited by a technical advisor or architect who, for a small fee, helps the members decide what will be the next room, how it will be laid out and how much material will be needed.

At the end of five weeks Patrimonio Hoy makes its first delivery of raw materials, valued at ten weeks worth of collections. Thus the program extends five weeks of credit to the socio members, further building credibility within the neighborhood. If the socio members remain committed to the program, the credit they are extended in the form of as-yet-unpaid-for raw materials increases. In the second 10-week period, for example, the raw material is delivered after the second week, in effect granting eight weeks of credit.

Margins to CEMEX distributors participating in the Patrimonio Hoy program typically are smaller—12% in some cases—than the 15% that is the average in the business. But distributors are nevertheless enthusiastic because those smaller margins are more than offset by the steady demand for cement and other raw materials like sand and gravel. And while conducting business on a credit basis with a low-income population with no regular stream of paychecks may appear riskier than traditional lending models, Patrimonio Hoy managers contend that the risks are in reality very low. The default rate so far has been less than one half of one percent, a consequence in part of the group commitment of socio members. After three years of operation, Patrimonio Hoy had 36,000 customers and over $10 million in extended credit. The customer base is reported to be growing at the rate of 1,500 to 1,600 per month.