This study reviews about Lafarge Malaysia Berhad, a company listed in Kuala Lumpur Stock Exchange (Bursa Malaysia, 2018). Lafarge Malaysia Berhad is a Malaysia- based investment holding company with its subsidiaries operates in the Malaysian construction industry engaging in manufacturing and sale of cement, ready-mixed concrete, aggregates and other related building materials.
1.1 Company Background
Lafarge Malaysia Berhad, also known as Malayan Cement has a long history back in the 1950s for having a cement production facility that support the rebuilding and development efforts in the region following six years of destructive World War II events. In 1960, Malayan Cement changed its name to Malayan Cement Berhad and became a listed company in the Malayan Stock Exchange. Throughout the year, Malayan Cement Berhad had acquire Pan Malaysia Cement and became the largest cement producer in Malaysia with an annual output of 8 million tons of cement per year. In year 2001, Malayan Cement Berhad was acquired by Lafarge Cement Group which was then changed its name to Lafarge Malayan Cement Berhad and subsequently changed to Lafarge Malaysia Berhad. A Group’s merger of Lafarge and Holcim in Malaysia took place in November 2015 and Holcim Malaysia became part of the Lafarge Malaysia group of companies. Until now, Lafarge had their first Construction Development Laboratory in South East Asia at Wisma Lafarge in Petaling Jaya, integrated cement plants in Langkawi which is designated for the export market, while Kanthan and Rawang caters the domestic market, two cement grinding stations in Pasir Gudang, two Drymix plants, around 40 ready-mixed concrete batching plants and four aggregates quarries throughout Peninsular Malaysia, well connected by road, rail and sea.
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1.2 Company Vision and Mission
Lafarge Malaysia’s vision is to conduct the business with a goal of zero harm to people and to create a healthy and safe environment for the employees, contractors, communities and customers (Lafarge Malaysia Berhad, n.d.).
To realize the above vision, Lafarge Malaysia are committed to four (4) missions whereby the first is to create a healthy and safe environment for all stakeholders based on a true safety culture while maintaining a global Health and Safety Management System designed to continuously improve the performance and actively manage the risk in business. Apart from that, Lafarge Malaysia also targeting its operational discipline by instilling a mindset of safe execution and follow-up and lastly to have an open communication with all stakeholders on relevant health and safety issues.
They believe that “if we’re good in safety, then we’re good in business” (Lafarge Malaysia Berhad, n.d.). Health and safety is a critical success factor in operational performance and it became a core competency at all levels of Lafarge Malaysia’s organization.
2. Identification and Explanation of Organisational Structure
Organizational structure refers to the technique and way of delegating authority and duties to all workforces in organisation. And as apparent, organisational structure can be divided into different departmentalization such as functional, divisional, customer, geographical and matrix. Lafarge has been managing organisational processes using hierarchical structure where the Board of Directors (“Board’) makes all critical decisions which are then passed down through subsidiary levels of management. This structural aspects of Lafarge helps the business to maintain its disciplinary acts and at the same time assist in maintaining work processes to flow in adequate manner.
Among all the structures, Lafarge practices functional departmentalization which structured the departments based on common functions in a bottom-up manner, creating various department including sales, logistics and procurement, aggregates and cementitious, organization and human resource, accounting, marketing and pricing, concrete and infrastructure and lastly industrial department. For instance, organisation and human resource department is in charge of the organisation’s manpower, recruitment, training, compensation and employee separation matters while health and safety department will take lead in on-site evaluation to ensure the practices of health and safety from daily routines in plants to the work sites and in neighbouring communities. This structure is effective in developing employees as they may narrow their field of focus and become experts in specific functions but indeed it would be a challenge to facilitate strong communication between different departments. In line with Lafarge’s practices on the appointment of board and senior management, the company’s board and management consists of qualified individuals with a good mix of technical and commercial experience altogether with both local and international operational experience which would aid in solving non-trivial problem while being able to coach the junior staff in the organisation (Lafarge Malaysia Berhad, 2018).
According to Lafarge Malaysia Berhad (2018), Lafarge practices divisional departmentalization for its multiple products which segmented into two main operating divisions namely cement and the other is aggregates and concrete division where each division corresponds to the end products and has its own set of functional units such as research, manufacturing, sales and marketing. This approach allows the team to focus upon a single product, with a leadership structure that supports its major strategic objectives. For example, the sales and marketing team of each division have a better knowledge on its products as they solely focus on the particular products to promote it to their existing customers or contractors while trying to get a new source of clients along the way.
Lafarge organisation structure was mainly influenced by the size of its organisation. Having its subsidiaries to engage in various activities, the scope of operations had increased to such extent to necessitate task specialization and some degree of decentralization in decision making as each separate business unit is autonomous for all practical purpose, and later being reported to head office. Lafarge is believed to have numerous employee across its organisation which is shown in their 2017 annual report for yielding RM 238,212 million solely on their staff costs (Lafarge Malaysia Berhad, 2018).
Apart from that, Lafarge organisation structure is also influenced by the need of different technology method to be implemented in their respective segmentation. As Lafarge manufactures cement in their plant located across Malaysia, this requires a lot of work specialisation, skill, knowledges, advanced technology and equipment in order to enhance the mass production of cement to cater for the market. The increasing of complexity is associated with more levels of management, more staff personnel, and small spans of control at upper management levels.
Lafarge is seen to be a centralized organisation as all the major decision making needed to go through the top management for approval before the decision can be executed. On the positive side, this structure is better in the view of the communication of the business’s mission, goals, and objectives to all employees as the planning and execution to all employees are centrally directed which would be easier to keep the activities of various units and individuals coordinated. It also results to a better decision making as the decision was made by the top management who have the most experience and a broader perspective than individuals at lower levels which can then balance the needs of various parts of the organisation. However, this kind of structure had raised the organisation’s administrative overhead costs apart from resulting a sluggish and inefficient communication in which managers at various levels are required to deliver information to too many people for too many levels of approval.
3. Identification, Clarification and Strategies of the Top Management
Board of directors’ charter of Lafarge Malaysia outlined that the Board is accountable for the performance of the company as they represent the shareholders to promote and protect the interests of the company (Lafarge Malaysia Berhad). The Board is responsible to review and assesses the implementation of strategic business plan for long term sustainable growth and the appropriate corporate disclosure procedures for the company.
The Executive Director, President & Chief Executive Officer, Thierry Legrand joined Lafarge in 1992 as an engineer in charge of cement plants automation followed by a role as process and production manager before being promoted as plant manager for three years. During his time as a Human Resources Director at Lafarge Cements France, he played an integral part in the development of talents for the Group to prepare for international growth. Having contributed 5 years to this role, he was Lafarge Plasterboard’s General Manager for Germany and the Netherlands where the development of innovation and marketing positioning on technical segments in both countries were vital. His most recent roles were Chief Executive Officer of Lafarge South Africa from 2009 to 2014, and was Lafarge Group’s Senior Vice President, Transformation Acceleration (Innovation) based in France, prior to his new appointment to the Board on 14th August 2015 (Lafarge Malaysia Berhad, 2017). With effective from 1st April 2018, Thierry resigned as President & Chief Executive Officer, Executive Director and subsequently being appointed by Mario Gross. The Executive Director, Chief Financial Officer, Michael Lim Yoke Tuan joined Lafarge Malaysia Berhad as Chief Financial Officer in October, 2014 and subsequently being appointed to the board on 26th February 2015. Prior to joining Lafarge, he has worked as Chief Financial Officer for Lion Group Malaysia, Sun Hung Kai Properties China, and CP (Chareon Pokhphand) Lotus Hong Kong respectively besides serving as Financial Controller for PepsiCo Greater China, Hutchision Whampao Hong Kong, Guoco Group Hong Kong, and Hong Leong Group Malaysia respectively. (Lafarge Malaysia Berhad, 2017).
The construction industry as a whole was seen to be slow in recent years. However, Lafarge Malaysia is determined to strengthen its leading position in the Malaysian market and continues to invest in the operations, as well as in opportunities as Malaysia expands its infrastructure, while focusing on efficiency and cost cutting to strive for future industrial excellence. Throughout the year, a few strategies were carried out by the top management to eliminate the occurrence of losses while helping the company to grow further.
In 2017, Lafarge started the Flagship Outlet Program to widen its reach to the high-margin retail segment, comprising small contractors, renovators, as well as home owners with selected retail stores outfitted a “Perfect Wall” display to showcase its products and demonstrates step-by-step methods on product application to build a perfect wall (Lafarge Malaysia Berhad, 2018). In line with Flagship Outlet Program, all retailers are supported with in-store promotions, advertising, product training for their staff and guidance on product application to end-users. It was targeting to achieve 50 flagship stores across the country and two Pro-Builder Centre stores which carry comprehensive range of building materials by the end of 2017 (Analyst Reports by AmInvestment Bank, 2017). Lafarge management does not solely focuses on widening the offline store market but also make a move to participate in online marketing which it had been a recent trend for all businesses to go online. With the positive influence of e-commerce world, Lafarge make its entry into the e-commerce channel with the launch of “shop-in-shop” on Malaysia’s leading digital marketplace, Lazada (Lafarge Malaysia Berhad, 2018).
Lafarge are committed to inclusivity and regularly engaged with community activities, therefore in February 2018, Lafarge Malaysia and EdgeProp.my has teamed up for the Lafarge-EdgeProp MYHOME initiative program, which enables Malaysians to actively co-create their ideal home by answering 28 simple questions at www.edgeprop.my/myhome in a nationwide survey that have been carefully crafted to draw out the respondents needs and wants in an ideal home but not house (Khoo, 2018). This initiative comprises three segments – survey, design and built whereby all the respondents’ answer will be collated and analyzed to determine what Malaysians want in their ideal home. The consensus on the functions and features of Malaysia’s ideal home will then be used as a basis for the building of Malaysia’s Ideal Home, constructed by S P Setia, alongside with Feruni, Lightcraft, Nippon Paint and Panasonic (Lafarge Malaysia Berhad, 2018).
In accordance to this initiative, all leaders in their respective industries are cemented in efforts to drive the industry forward through sustainable solutions to improve the quality of living for urbanites. This is truly a game changing proposition for the home ownership landscape in Malaysia and Lafarge-EdgeProp MYHOME aims to see the realisation of Malaysians’ ideal home as this home that Malaysians co-create will be built and put on the market for sale.
A Sustainable Development Plan, simply known as “the 2030 Plan” had been launched by LafargeHolcim Group back in year 2016 and Lafarge Malaysia’s came up with a sustainable goals for 2020 mirror the larger Group’s objectives through a series of strategies that are to be employed locally in terms of the four key areas of the 2030 Plan (Lafarge Malaysia Berhad, 2018). This plan are intended to incorporate proven sustainable practices into its business model while making it as a key lever for growth.
The manufacturing process of cement requires the production of clinker, which results in CO2 emissions through the limestone decarbonisation process and energy consumption. Looking into the key areas on climate change, Lafarge Malaysia aims to reduce the CO2 emissions by improving plant energy efficiency in order to reduce the heat consumption, increase the thermal substitution by using more water-derived and alternative fuels while minimizing its clinker factor by increasing the production and sales of blended cement. For environmental wise, the use of recycled water for production will be increased and a biodiversity blueprint for the plants will be implemented and begins with Kanthan plant.
In the view of current global waste, Lafarge promotes the use of construction and demolition waste in urban areas to produce recycled aggregates while putting in the technical development programs to improve waste management practices. From the view of enhancing quality life for communities, an affordable housing solutions such as FastbuiltTM will be deployed (Lafarge Malaysia Berhad, 2018). The emphasis on Health and Safety will still be continued through various training to achieve a zero fatality target whereby in 2016, Lafarge had received ISO39001 certification in their Road Transport Management System.
4. Identification of Critical Issues
According to a recent research by AllianceDBS Research (2018b), the competitive pressures in Malaysia’s cement industry are unlikely to ease in 2018 due to the excess capacity while domestic cement demand is expected to remain sluggish (post GE14), after contracting by 8% in 2017. The reduced revenue was mainly attributed to weak market conditions, increased industry capacity and continued pricing pressures that led to a lower sales contribution from the Cement segment which eventually led to a voluntary separation scheme in year 2018.
AllianceDBS Research (2018b) shown a series of capacity expansions undertaken by other Malaysian cement producers like Hume Cement, CIMA and YTL Cement from year 2013 to 2016 which brings an addition of 25% capacity to the industries while domestic cement demand growth contracted further by 8% as compared to 2016. Weaker domestic cement demand from slow construction activities could force Lafarge to export more of its cement, but export prices are usually lower than prevailing domestic prices. Since then, overcapacity has become the main concern for the industry while at the same time, annual domestic demand growth has been insufficient to absorb the expanded capacity, which lead to the falling in net selling prices. These earnings are expected to recover if the gap between supply and demand gets narrowed.
Even though Lafarge commands a brand premium but the pricing of its product is still a significant barometer to revenue as it is a homogenous product. As such, pricing pressures will likely to persist if cement players offer larger rebates to gain the market share. Following the intense price competition between industry players such as Hume, YTL and Tasek, the current rebate for bulk cement has increased to RM170/tonnes as compared to the last quarter where the rebate was only recorded at RM150/tonnes. Lafarge management also highlighted that cement price has dropped more than 10% since January 2017 (AllianceDBS Research, 2018a). Price recovery usually starts with bag prices to stay at a sustainable level, followed by the increase in bulk prices and in order to boost up the price, it requires other cement players to collectively increase their prices as well. Eventually, this is not easy but rather tough especially when the whole industry is still struggling with excess capacity.
Mainly driven by the increasing demand from infrastructure projects, Lafarge expected the cement demand growth could turn positive especially after it reached an agreement with China Communications Construction Sdn Bhd to supply cement for all eight packages of work for the proposed East Coast Rail Link (ECRL) project with an estimated value of RM270 milion cement supply. Prior to the woes of new federal government’s election pledge in 2018, all mega projects including ECRL projects are going to be reviewed by new government. Given that Lafarge revenue is highly dependent on big scale projects such as infrastructures, this woes might cause the cement demand to contract further as there is a high possibility that these projects will be delayed or even cancelled.
The largest cost components in cement production are coal and electricity constituting about 40-50% of total production costs. According to AllianceDBS Research (2017), thermal coal price has risen to USD100/tonne, yielding 45% higher than 2016’s average of USD66 and 12% higher than the year to date average of USD87. This will put pressure on its margins since coal accounts for c.30% of cement production cost. Although Lafarge hedges a major portion of its annual coal requirements via fixed-price and index-linked contracts, the recovery in coal prices since early 2016 has generally led to higher costs for cement producers. However, cost savings will be continued by increasing efficiency and use of more alternative fuels.
Lafarge Malaysia Berhad is a large organisation as a whole that operates in a functional and divisional departmentalization affected from the size of its organisation and also the technology used in different division. The practices of centralization management had hold back its organisational efficiency and effectiveness, leading to a downsizing process in 2018 to shrink the size of the work force. It is important to implement different strategies and organisation form as the organisation grows in size, complexity and product market coverage in order to achieve a well designed organizational structure that may produce an effective yet an efficient communication channels while encouraging fast and clean decision making.
A few strategies had been implemented to help the organisation to generate more revenue such as the launching of Flagship Outlet Program and online marketing via e-commerce channel to reach the end consumer market, introducing MYHOME initiative program to create an ideal home along with the consensus of functions and features favoured by majority of Malaysians and lastly the implementation of sustainable goals for 2020 in line with the four key areas of the sustainable development plan launched by LafargeHolcin Group which intended to incorporate proven sustainable practices for the further growth of the organisation.
However due to unforeseen circumstances, the organisation is going into a further losses in its latest financial year. This includes the overcapacity of supply and weaker domestic demand which eventually leads to a fall in its price with larger offer rebates among the competitors to gain the market share. Despite from the increase of cost components in the production level, the review on mega infrastructure projects such as the ECRL projects in which if the projects might be delayed or cancelled is one of the major current issues faced by the organisation.
It could be seen that the higher sales contribution from Concrete segment only partially mitigated the group’s revenue decrease. Lafarge’s profitability might be improved in the near future if there is a stronger growth in the construction and property sectors which could lift the demand of the cement to reduce its over excess capacity that would led to a stabilization of the cement pricing.
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Lafarge Malaysia Berhad. (n.d.). THE BOARD OF DIRECTORS’ CHARTER. Retrieved June 27, 2018, from Lafarge Malaysia Berhad: https://www.lafarge.com.my/sites/malaysia/files/documents/board_charter_2017_1.pdf