Fossil making moves to beat competition
LAFARGE Cement in the week announced that there was an agreement between Holcim and Fossil Mining for a sale of 76,45 percent of the company to Fossil.
Fossil shrugged off competition from four other companies including a Chinese company, Huaxin.
“Further to the cautionary announcement dated 31 May 2022, shareholders and members of the investing public are advised that Associated International Cement Limited, a member of the Holcim group, has entered into a binding agreement for the sale of its 76,45 percent stake in Lafarge Cement Zimbabwe Limited to Fossil Mines (Private) Limited,” Lafarge said in notice.
Fossil Mining is part of the Fossil Group that does mining and construction, and taking over Lafarge is a major buy for the group.
Since June last year, the Fossil Group has been awarded more than 17 contracts, collectively worth almost US$45 million, by the Transport and Infrastructural Development Ministry.
Fossil Contracting is one of five contractors working on the Beitbridge Highway, and is part of a consortium that was awarded a contract to build the Mbudzi interchange in Harare.
The company being bought by Fossil Mining is close to commissioning a new Vertical Cement Mill plant, which will more than double Lafarge’s annual cement milling capacity to one million tonnes.
Currently, 40 percent of Zimbabwe’s cement requirements are imported an issue which should have been a motivating factor for Fossil mines to get into backward integration.
For Fossil the deal does make sense as the contracting arm will need cement on a daily basis and need to beat their competitors on bids.
Dr Prosper Chitambara said; “By acquiring the manufacturer of their major raw material, Fossil Mines exercises greater control over the supply chain process from the production of cement to final construction. Fossil will gain control over the quality of cement that is used in the construction of their projects.”
Acquiring the supplier of cement, Fossil will achieve greater control over the quantity and delivery of the product to its construction sites.
With the country importing almost half of its cement requirements, the supply chain process comprises many middlemen, which means that each phase in the supply chain includes a mark-up to allow the middleman to earn a profit.
Thus, by the time the product gets to the company’s warehouse, the price will have doubled or tripled and this will make the construction project more expensive for the customer.
Prof Tony Hwakins said; “By acquiring the Lafarge, the company will do away with the middlemen involved in the process and reduce the cost of purchasing the raw materials. Controlling the supply chain will reduce wastages, transport costs, and other costs incurred before the raw materials are delivered.”
Companies also use backward integration as a way to gain a competitive advantage over their competitors.
In this case Fossil Mines will have an advantage over other companies in the industry as they will have lower costs when bidding for contracts as they control the supply chain.
Acquiring Lafarge means competitors buying from the same company, they are at a disadvantage as they are behind Fossil Contracting in the queue for supply and have to source for alternative supply.
Fossil by acquiring suppliers also create barriers to entry in the industry as new competitors will face difficulties getting suppliers of cement who can supply them on time.
“Implementing backward integration can result in inefficiencies. By acquiring the supplier of raw materials required in the production process, the company will limit competition, resulting in sluggishness and lack of innovation,” Dr Chitambara said.
The company will be less motivated to spend money on research and development. As a result, the quality of the company’s end product may decline, and the costs of managing customer complaints will increase.
Prof Hawkins said, “A disadvantage of backward integration is the substantial investment that will be needed to finance the acquisition. Fossil has to be wary that it may be forced to utilise all its cash reserves and even take up more debts to finance recapitalisation of Lafarge.”
Fossil is a Zimbabwean firm, specialising in civil works, contract mining, road construction, earth works, building and structural works and plant hire.
Since its inception in 2010, the company has grown in leaps, it has its footprint in Zimbabwe and is currently being courted into the Mozambican and Zambian market.