Entry and growth strategies in Brazilian
construction equipment market
Market study
April 2011
2011-04-14_Market_Entry_Strategy Brazil.pptx
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Contents
A. Brazilian construction equipment industry is growing strongly and offers attractive growth options
– Brazil is among the World's fastest growing construction equipment markets growing at 15% p.a.
– Strong market dynamics offering a window of opportunity to enter and expand while Chinese players
are still in a niche position
B. To meet the challenges of the Brazilian construction equipment industry, several key aspects need
to be addressed
– Public financial credit support FINAME offers attractive financing conditions that favor local production
in Brazil
– Production location heavily impacts taxes, labor costs/quality and logistics aspects
– Even if different sourcing strategies are possible, FINAME support depends heavily on degree of
national sourcing
– Additional aspects to consider are distribution channel strategy, rental business and export strategy
C. Brazilian market is unique and has to be approached with a tailored strategy and business model
– Six key levers identified to successfully enter and expand in the Brazilian construction equipment
market
This document was created for our client. The client is entitled to use it for its own internal purposes. It must not be passed on to third parties except with the explicit prior consent of Roland Berger Strategy
Consultants. This document is not complete unless supported by the underlying detailed analyses and oral presentation.
© 2011 Roland Berger Strategy Consultants GmbH
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A. Growth potentials in the Brazilian construction
equipment market
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Brazil is among the most attractive construction markets worldwide
because of its strong and lasting growth perspectives
Brazilian construction industry market positioning and development
GROWTH RATES CONSTRUCTION INDUSTRIES1)
World
Asia (excl. Japan)
Brazil
Middle East + Africa
South America
EU - Eastern
North America
EU - Western
-0.5%
BRAZILIAN CONSTRUCTION INDUSTRY [USD bn]
2.3%
7.1%
5.1%
3.5%
3.2%
2.5%
2.0%
CAGR +5.1%
0%
52.1
+7%
52.1
55.5
58.1
61.4
64.2
67.8
2008 2009 2010e 2011e 2012e 2013e 2014e
> Strong growth of the Brazilian construction
industry compared to most other regions
worldwide
> Continuing and stable growth in the
construction industry driving demand for
construction equipment
1) CAGR 2008-2013
Source: WMI; Roland Berger
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The construction equipment market also experiences strong growth
that is expected to continue to grow at 15% per year
Development of the construction equipment sales 2008-2014 ['000 units]1)
MAIN DRIVING FACTORS
+ 15% CAGR
38.6
33.8
-16%
+23%
29.3
25.5
22.1
21.4
18.0
2008
2009
1) Without cranes & tractors
Source: Yengst; Roland Berger
2010e
2011e
2012e
2013e
2014e
> Government investment program
PAC2) ("Growth Acceleration Plan")
> Regulations and governmental
support schemes favor local
investment
> Strong long term demand driven
especially by residential and
infrastructural construction
> Megaevents FIFA World Cup 2014
and Olympic Games 2016 drive
further investments in infrastructure
and civil construction
2) PAC: " Programa de Aceleração do Crescimento" (Growth Acceleration Plan)
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Backhoe loaders, excavators and wheel loaders have the strongest
growth in sales prospected because they are all-purpose vehicles
Product segments of the CE market in Brazil 2009/20141) [sales units/share]
Dozers
693
CAGR
(4%)
13%
Boom lifts
1.200
CAGR
(7%)
22%
3.200
(8%)
Scissor lifts
1.035
CAGR
(6%)
24%
Compactor rollers
1.115
CAGR
(6%)
7%
3.500
(4%)
Skid steer loaders
1.219
CAGR
78%)
23%
3.500
(9%)
Motor graders
1.320
CAGR
(7%)
16%
2.800
(7%)
Wheel loaders
2.621
CAGR
(15%)
18%
1.275
(3%)
Asphalt pavers
135
CAGR
(1%)
13%
3.000
(8%)
Haulers
92
CAGR
(1%)
29%
18,027
6.000
(16%)
250
(1%)
Backhoe loaders
5.190
CAGR
(29%)
13%
Excavators
3.407
CAGR
(19%)
16%
360
(1%)
9.600
(25%)
7.020
(18%)
1) Without cranes & tractors
Source: Yengst; Roland Berger
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Window of opportunity to enter the Brazilian market is now, while
Chinese players are still in a niche in terms of volume
Sales of construction equipment in Brazil by company1) (2009) [units]
SALES VOLUME
3,870
Randon
Dynapac
3,180 Bobcat
AGCO
2,880
1,540
1,320
1,130 1,100
830
800
790
600
Proton
Haulotte
Liebherr
Ciber (Wirtgen)
Terex Roadbuilding (Cifali)
Ingersoll-Rand
> Large global players
dominate the market with
market leaders Caterpillar
and Case
> Recent market entries,
especially of Chinese players
(XCMG, Sany, Liugong) have
increased competition in the
market, however they are not
yet strong enough to
compete with the big players
Others2)
Fiat Allis
(CNH-Group)
(CNH-Group)
(CNH-Group)
Window of opportunity to enter/
expand in the Brazilian market
1) Without cranes & tractors
2) Contains only players with less than 1% market share
Source: Yengst; Roland Berger
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B. Strategic aspects of the Brazilian market for
construction equipment
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Eight major strategic aspects need to be addressed in order to
develop a successfully growth strategy for Brazil
The Brazilian construction
equipment market is unique
> Complex tax legislation and
strong impact of tax negotiations
> Protectionist market through
customs/import restrictions
> Public financing programs
> Strong regional differences in
labor skills and competition on
the labor market
> Significant distances to bridge
>…
Source: Roland Berger
FINAME and uncertainty about import tariffs
are the main drivers for local production
1
Incentives
and barriers
2
Taxes
3
Labor costs
and quality
4
Logistics
5
Sourcing
strategy
Sourcing strategy needs to optimize cost,
while fulfilling FINAME criteria
6
Distribution
channels
Four different distribution models possible
and used in the industry
7
Rental
business
Rental business is growing and needs to be
specifically addressed
8
Export
strategy
Brazil can be a hub for Latin America, but
also other strategies are successful
Production location must be evaluated with
special attention to taxes, labor costs and
logistics
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1
INCENTIVES AND BARRIERS
FINAME offers attractive financing conditions that favor local
production in Brazil
Public financial credit support by FINAME scheme
FINAME – MAIN CHARACTERISTICS
IMPLICATIONS
> Financing product from BNDES
(Brazilian Development Bank) for
production and acquisition of new
machinery and equipment,
domestically manufactured,
accredited by BNDES
> The financing is granted for products
with nationalization index, in value
and weight, superior to 60%
> Every 2 years company has to update
data with BNDES
> Possibility to apply to more than 1
credit line
> No maximum value to be financed
> All major players use FINAME
as financing solution
> High share of leasing in the
market leads to high financing
costs – FINAME offers low
financing rates and creates an
advantage against players that
don't participate in the program
(e.g. competitors that import)
> FINAME: acquisition of new
equipments
– Annual Interest rate: 7.9%1)
– Maximum financing: 80% - 100%
of the financeable items
> FINAME Leasing: acquisition of new
machineries and equipments
destined to renting/leasing
– Annual Interest rate: 9.8%1)
– Maximum financing: 100% of the
financeable items
1) Compared to > 20% market rate
Source: BNDES; Roland Berger
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1
INCENTIVES AND BARRIERS
Incentives for imports of equipment become uncertain after major
players localize production to Brazil
Import barriers and tariffs
Equipment WITHOUT national production
Import tariff > Import duty exemption (Ex-tarifárias) exist
policy
for the for specific equipments defined by the
government
Equipment WITH national production
TARIFFS CAN
(AND OFTEN
DO) CHANGE
UPON THE
START OF
LOCAL
PRODUCTION
> Import tariffs exist for equipment that is locally
produced
Government > Facilitating the availability of equipment to
interest
the national market that is not produced
nationally
> Protecting the national supply chain,
including equipment manufacturers and
suppliers
Product
examples
> Excavators, backhoe loaders
> Most aerial work platforms
Source: Roland Berger
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2
TAXES
Any set-up in Brazil (especially local production) needs to consider
the complex tax system
Taxation in Brazil
More than 90 DIFFERENT KINDS
the country on three federal levels
OF TAXES in
More than 200,000 TAX LAWS issued since 1990,
making it more than one per hour
Ranking 150th OF 183 COUNTRIES in the World
Bank's ease of paying taxes ranking
TAX BENEFITS through NEGOTIATION with
states is very promising
> Great annual savings in the range of millions USD
> Tax benefits highly depend on the state
Source: Interviews, tax laws, Roland Berger analysis
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2
TAXES
Taxes are the primary criterion for site location decisions in Brazil –
Exemplary sites provide tax incentives of up to 6% of sales volume
CASE EXAMPLE: Tax benefits – EBIT impact as percentage of total sales
> Upon first localization short-listing,
the primary decision criteria
includes tax incentives
EBIT impact of tax incentives1)
6.1%
> Tax incentives can be negotiated
with state governments
> The negotiation process is
conducted individually for each
company
> Legal frameworks exist but are
not exhaustive
5.1%
11
22
33
0.0%
Exemplary
areas
Area
Area
Area
1
2
3
1) Rough estimate based on volume of 2,000 units, average gross sales price of USD 200,000 and other assumptions
Source: Interviews, tax laws, Roland Berger analysis
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3
LABOR
Within Brazil labor costs and skill level of workers differ strongly –
Location selection is key in Brazil
CASE EXAMPLE: Annual labor cost variance for selected sites in Brazil1)
Labor costs1)
White-collar
+7%
11
22
33
-5%
Blue-collar
+39%
Exemplary
areas
1) Variance from average compared labor costs incl. benefits
Source: Interviews, Roland Berger analysis
White-collar
1 > Leadership
-2%
2
positions are,
relatively easy to
recruit
2 > Leadership
-25% -14%
1
Labor quality and availability
3
positions need to
be recruited from
outside the region
3 > Leadership
positions need to
be recruited from
outside the region
Blue-collar
> High competition among many
companies causes lack of skilled bluecollar workers (e.g. welders) and
engineers
> Experienced workforce with previous
jobs in the construction equipment or
automotive industry
> Unskilled workforce, mostly without any
previous jobs in the industry – Skilled
labor barely available
> Workforce without any training in the
manufacturing industry
> Some people recruited from farther
away
> Local recruitment of civil engineer is
easy
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4
LOGISTICS
Most established players have selected a manufacturing location
close to the main customer base
Site locations of the strongest players in the construction equipment market in Brazil
Key criteria for decision on site location
Minas Gerais
Paraná
Rio Grande
do Sul
Source: Interviews, Roland Berger analysis
São Paulo
>
>
>
>
>
>
>
Tax benefits and total taxes
Local supplier market
Market access
Labor costs and availability
Land and construction costs
Local infrastructure, transportation and logistics costs
Utility prices
Sao Paulo area advantages/disadvantages
> Suppliers are closeby
> Main customers are closeby
> Big construction works are
closeby
> Good labor quality is
available
> Area is saturated with
competitors
> No/Low tax incentives
given
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5
SOURCING STRATEGY
Different sourcing strategies are possible along the dimensions of
outsourcing and national sourcing
Sourcing strategy portfolio of main players in the Brazilian CE market
Competitor 2
NATIONAL SOURCING SHARE
> Different strategies
– Just matching FINAME requirements
(~60% national sourcing)
– Sourcing most available parts locally in Brazil
(~80% national sourcing)
> Typical locally sourced products include engine,
transmission, steel, track system/axle, etc.
> Steel purchase can be used to optimize the
national sourcing share to 60% at the time of high
steel prices in Brazil
Competitor 1
Competitor 3
Bubble size correlates
with sales (2009)
Competitor 4
Competitor 5
DEGREE OF OUTSOURCING
> Players' strategies vary from having a mere
assembly to in-house production of parts
Source: Interviews, Roland Berger
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6
DISTRIBUTION STRATEGY
4 different distribution models are present along the top players with
distinct split of responsibilities along the distribution channel
Distribution models present in the Brazilian construction equipment market
Decentralized
A dealer mgmt
Manufacturer
Distributor
Centralized
B dealer mgmt
Dealer
Manufacturer
Distributor
Importer's
C model
Dealer
Manufacturer
Distributor
Centralized
D distribution
Dealer
Manufacturer
Distributor
Dealer
Marketing/Brand mgmt.
Dealer mgmt.
Key account mgmt.
Logistics
Distribution center
Shops / Sales
After sales / Repair
> For sales to key clients,
manufacturers enter
negotiations
> Brand control via branding
policy and alignment with
distributor
Source: Company websites, interviews, Roland Berger
> For sales to key clients,
manufacturers enter
negotiations
> Dealer's with few shops that
exclusively trade the
manufacturers brand
> Distributors do the national
brand management for the
manufacturer
> Key accounts negotiate with
national distributor
> No distributors or dealers in the
country
> Distribution process entirely
centralized
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7
RENTAL BUSINESS
Trend towards rental urges the need for a specific rental strategy –
An approach synchronized with the distributor needs to be taken
Reasons and implications of the strong rental business in the Brazilian CE market
The rental business suits the needs
of the Brazilian market very good
> Easier financing
> Good and regular service
> Rental offers flexibility, because the
operator is not responsible for the
transport along the long distances
between construction sites
> Some of the biggest construction
projects are operated by syndicates
for which rental is less complicated
than buying (valuation issues,
attribution of wear on handover etc.)
Source: Ministry of Development, interviews, Roland Berger
Rental business within
construction
equipment market is
increasing in
attractiveness
Fleet to rent is currently est. at 14.5k units,
growing at 15% p.a.
High level of fragmentation exists
A strategy on how to
approach the rental market
has to be incorporated in
the business model
1
INTEGRATED
DISTRIBUTION
(The distributor is also
active in rental)
2
RENTAL ONLY
(Specialized rental
companies carry
product)
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EXPORT STRATEGY
8
Most CE manufacturers use Brazil as hub for exports to other Latin
American countries – Global/National strategies possible
Main export countries of Brazilian construction equipment industry1)
Construction
equipment exports [units]
150
to USA
30
590
to Others
80
90
Peru
Exports are expected
to grow strongly from
1,425 in 2009 to 2,905
in 2010 (+104%)
120
Chile
Total production:
18,030
Local usage:
16,650
360
Argentina
1 Global
manufacturing
2 Regional
production hub
3 National
manufacturing
> Manufacturing certain
models in Brazil for
the global market
> Using Brazil as the
manufacturing base for
Latin or South America
> Producing in Brazil for the
national market only
Most companies use Brazilian plants as manufacturing hubs for
Latin America only
> Exporting to Argentina makes sense due to exemption of import tariffs
(Mercosul) and relatively low logistics cost
> Depending on market drivers such as exchange rate and logistics cost,
exportation to Colombia, Mexico or even the US may make sense
> In the case of Chile and Peru, we recommend to compare logistics cost and
import tariffs for import from Brazil or other production countries – Komatsu
is catering for these markets from its Brazilian plant
1) Without cranes and tractors
Source: Ministry of Development, interviews, Roland Berger
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C. Six steps to successfully enter and succeed in the Brazilian
market for construction equipment
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Roland Berger offers wide support to construction equipment
makers to successfully enter and grow in Brazil (1/2)
Potential areas of Roland Berger support
1
Understanding of local market landscape
> Local market size and developments (e.g., by product, segment, region, etc.)
> Local competition and new market entrants
> Market characteristics, regulations and customer requirements
2
Development of a business plan
> Development of business model (production set-up, sourcing strategy, etc)
> Expected cost of production in Brazil
> Necessary investments and required start-up cost
3
Selection of production location
> Short-listing and pre-selection of attractive site locations
> Detailed review of selected short-list locations (taxes, labor cost and availability, logistics cost, etc.)
> Negotiation support
Source: Roland Berger
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Roland Berger offers wide support to construction equipment
makers to successfully enter and grow in Brazil (2/2)
Potential areas of Roland Berger support
4
Localization of supply chain
> Identification of local suppliers per critical component (available and capable)
> Cost structure of locally produced parts
> Negotiation support with suppliers
5
Development of a clear sales and distribution strategy
> Define/optimize dealer network (incl. rental)
> Develop product and service portfolio for dealers
> Define internal sales & distribution structure
6
Support of operational ramp-up
> Necessary steps to take (must-haves, checklist)
> Key milestones and quality gateways
> Implementation organization and timeline
Source: Roland Berger
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impact!
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