roland berger brazilian construction equipment market 20110414
TRANSCRIPT
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12011-04-14_Market_Entry_Strategy Brazil.pptx
Market study
Entry and growth strategies in Brazilian construction equipment market
April 2011
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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
Source: WMI; Roland Berger
Brazilian construction industry market positioning and development
2014e
CAGR +5.1%
52.1
2012e 2013e2011e2008 2009 2010e
67.8
0%
64.2
+7%
61.452.1 55.5 58.1
North America 2.0%
EU - Eastern 2.5%
South America 3.2%
Middle East + Africa 3.5%
Asia (excl. Japan) 7.1%
World 2.3%
EU - Western
Brazil 5.1%
-0.5%
GROWTH RATES CONSTRUCTION INDUSTRIES1) BRAZILIAN CONSTRUCTION INDUSTRY [USD bn]
> Continuing and stable growth in the construction industry driving demand for construction equipment
> Strong growth of the Brazilian construction industry compared to most other regions worldwide
1) CAGR 2008-2013
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The construction equipment market also experiences strong growth that is expected to continue to grow at 15% per year
-16%
+ 15% CAGR
+23%
2014e
38.6
2013e
33.8
2012e
29.3
2011e
25.5
2010e
22.1
2009
18.0
2008
21.4
MAIN DRIVING FACTORS
> 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
1) Without cranes & tractors 2) PAC: " Programa de Aceleração do Crescimento" (Growth Acceleration Plan)
Development of the construction equipment sales 2008-2014 ['000 units]1)
Source: Yengst; Roland Berger
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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]
Backhoe loaders5.190(29%)
Excavators3.407(19%)
Motor graders1.320(7%)
Skid steer loaders1.21978%)
Compactor rollers1.115(6%)
1.275(3%)
Asphalt pavers135(1%)
Haulers92(1%)
Wheel loaders2.621(15%)
18,027 9.600(25%)
7.020(18%)
6.000(16%)
2.800(7%)
3.500(9%)
3.200(8%)
Dozers693(4%) 250
(1%)
360(1%)
CAGR13%
CAGR16%CAGR
18%
CAGR16%
CAGR23%
CAGR13% CAGR
13%
CAGR29%
1) Without cranes & tractors
Source: Yengst; Roland Berger
CAGR7%
Boom lifts 1.200(7%)
CAGR22%
3.000(8%)
Scissor lifts1.035(6%)
CAGR24%
3.500(4%)
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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 VOLUME
600790800830
Others2)
Ingersoll-Rand
Terex Road-building (Cifali)
Ciber (Wirtgen)
Liebherr
Haulotte
Proton
AGCO
Bobcat
Dynapac
Randon
3,180
1,1001,1301,320
1,540
2,880
3,870
Fiat Allis
(CNH-Group) (CNH-Group) (CNH-Group)
1) Without cranes & tractors2) Contains only players with less than 1% market share
> 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
Window of opportunity to enter/ expand in the Brazilian market
Sales of construction equipment in Brazil by company1) (2009) [units]
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
Source: Roland Berger
2
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
> …
Taxes
Labor costsand quality
Sourcing strategy
Distribution channels
Incentives and barriers
Export strategy
Rental business
3
5
6
1
8
7
Production location must be evaluated with special attention to taxes, labor costs and logistics
Sourcing strategy needs to optimize cost, while fulfilling FINAME criteria
Four different distribution models possible and used in the industry
FINAME and uncertainty about import tariffs are the main drivers for local production
Brazil can be a hub for Latin America, but also other strategies are successful
Rental business is growing and needs to be specifically addressed
4Logistics
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FINAME offers attractive financing conditions that favor local production in Brazil
Source: BNDES; Roland Berger
Public financial credit support by FINAME scheme
FINAME – MAIN CHARACTERISTICS IMPLICATIONS
> All major players use FINAMEas 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)
> 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
> 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
1 INCENTIVES AND BARRIERS
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Incentives for imports of equipment become uncertain after major players localize production to Brazil
Source: Roland Berger
Import barriers and tariffs
1 INCENTIVES AND BARRIERS
Equipment WITHOUT national production
Import tariff policy
> Import tariffs exist for equipment that is locally produced
Equipment WITH national production
> Excavators, backhoe loadersProduct examples
TARIFFS CAN
(AND OFTEN
DO) CHANGE
UPON THE
START OF
LOCAL
PRODUCTION
> Import duty exemption (Ex-tarifárias) exist for the for specific equipments defined by the government
> Most aerial work platforms
> Facilitating the availability of equipment to the national market that is not produced nationally
> Protecting the national supply chain, including equipment manufacturers and suppliers
Government interest
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Any set-up in Brazil (especially local production) needs to consider the complex tax system
Source: Interviews, tax laws, Roland Berger analysis
2 TAXES
Taxation in Brazil
More than 90 DIFFERENT KINDS OF TAXES in the country on three federal levels
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
> Great annual savings in the range of millions USD
> Tax benefits highly depend on the state
TAX BENEFITS through NEGOTIATION with
states is very promising
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Taxes are the primary criterion for site location decisions in Brazil –Exemplary sites provide tax incentives of up to 6% of sales volume
Source: Interviews, tax laws, Roland Berger analysis
2 TAXES
CASE EXAMPLE: Tax benefits – EBIT impact as percentage of total sales
1) Rough estimate based on volume of 2,000 units, average gross sales price of USD 200,000 and other assumptions
> Upon first localization short-listing,
the primary decision criteria
includes tax incentives
> Tax incentives can be negotiated
with state governments
> The negotiation process is
conducted individually for each
company
> Legal frameworks exist but are
not exhaustive
EBIT impact of tax incentives1)
6.1%
5.1%
0.0%
1 2 3
1
2
31
2
3
Exemplary areas
Area Area Area
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Within Brazil labor costs and skill level of workers differ strongly –Location selection is key in Brazil
Source: Interviews, Roland Berger analysis
3 LABOR
CASE EXAMPLE: Annual labor cost variance for selected sites in Brazil1)
1) Variance from average compared labor costs incl. benefits
1
2
31
2
3
Exemplary areas
Labor costs1)
+7%
-5%-2%
White-collar
1 2 3
Labor quality and availability
White-collar Blue-collar
1 > Leadership positions are, relatively easy to recruit
> High competition among many companies causes lack of skilled blue-collar workers (e.g. welders) and engineers
> Experienced workforce with previous jobs in the construction equipment or automotive industry
2 > Leadership positions need to be recruited from outside the region
> Unskilled workforce, mostly without any previous jobs in the industry – Skilled labor barely available
3 > Leadership positions need to be recruited from outside the region
> Workforce without any training in the manufacturing industry
> Some people recruited from farther away
> Local recruitment of civil engineer is easy
+39%
-25% -14%
Blue-collar
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> 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
Most established players have selected a manufacturing location close to the main customer base
Key criteria for decision on site location
Minas Gerais
São PauloParaná
Rio Grande do Sul
Site locations of the strongest players in the construction equipment market in Brazil
Source: Interviews, Roland Berger analysis
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 withcompetitors
> No/Low tax incentivesgiven
4 LOGISTICS
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Different sourcing strategies are possible along the dimensions of outsourcing and national sourcing
Source: Interviews, Roland Berger
5 SOURCING STRATEGY
Sourcing strategy portfolio of main players in the Brazilian CE market
DEGREE OF OUTSOURCING
NA
TIO
NA
L S
OU
RC
ING
SH
AR
E
Bubble size correlates with sales (2009)
> 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
> Players' strategies vary from having a mere assembly to in-house production of parts
Competitor 1
Competitor 2
Competitor 3
Competitor 4
Competitor 5
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4 different distribution models are present along the top players with distinct split of responsibilities along the distribution channel
6 DISTRIBUTION STRATEGY
Distribution models present in the Brazilian construction equipment market
Source: Company websites, interviews, Roland Berger
Decentralized dealer mgmt
Centralized dealer mgmt
Importer's model
Centralized distribution
Marketing/Brand mgmt.
Dealer mgmt.
Logistics
Distribution center
Shops / Sales
After sales / Repair
Manu-facturer
Distri-butor
DealerManu-
facturerDistri-butor
DealerManu-
facturerDistri-butor
DealerManu-
facturerDistri-butor
Dealer
A B C D
Key account mgmt.
> For sales to key clients, manufacturers enter negotiations
> Brand control via branding policy and alignment with distributor
> 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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Trend towards rental urges the need for a specific rental strategy –An approach synchronized with the distributor needs to be taken
7 RENTAL BUSINESS
Reasons and implications of the strong rental business in the Brazilian CE market
Source: Ministry of Development, interviews, Roland Berger
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.)
Rental business within construction equipment market is increasing in attractiveness
Fleet to rent is curren-tly est. at 14.5k units, growing at 15% p.a.
High level of frag-mentation exists
1INTEGRATED DISTRIBUTION (The distributor is also active in rental)
A strategy on how to approach the rental market has to be incorporated in the business model
2RENTAL ONLY (Specialized rental companies carry product)
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Most CE manufacturers use Brazil as hub for exports to other Latin American countries – Global/National strategies possible
8 EXPORT STRATEGY
Main export countries of Brazilian construction equipment industry1)
Source: Ministry of Development, interviews, Roland Berger
Construction equipment exports [units]
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
Total production: 18,030
Local usage:16,650
360Argentina
90Peru
120Chile
150to USA30 590
to Others
80
Exports are expected to grow strongly from 1,425 in 2009 to 2,905 in 2010 (+104%)
1) Without cranes and tractors
Global manufacturing
Regional production hub
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
1 2 3
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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)
Source: Roland Berger
1Understanding 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
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
3
2Development 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
Potential areas of Roland Berger support
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Roland Berger offers wide support to construction equipment makers to successfully enter and grow in Brazil (2/2)
Source: Roland Berger
5Development 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
6Support of operational ramp-up
> Necessary steps to take (must-haves, checklist)
> Key milestones and quality gateways
> Implementation organization and timeline
Potential areas of Roland Berger support
4Localization of supply chain
> Identification of local suppliers per critical component (available and capable)
> Cost structure of locally produced parts
> Negotiation support with suppliers
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Your contacts for further questions
Partner
Sao Paulo Office+55 (11) 3046-7111
ProjectManager
Munich Office+49 (89) 9230-8634
Partner
Stuttgart Office+49 (711) 3275-7420
[email protected] Partner
London Office+44 (20) 3075-1116
Our experts
NorbertDressler
StephanKeese
Paul Sloman
AndrásTóth
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It's character that createsimpact!