In this first instalment of a two-part article, Daniel Moffat, Managing Director, Moffat Consulting & Technology, UK, gives a rare insight into the intricacies of the Latin American market for machinery imports.
For those wanting to sell machinery and construction equipment in Latin American countries, there is a certain amount of mystery as to what is acceptable and what is not. On top of this, there are a number of market rumours about just how to go about trading within the sector. Some say import restrictions are open to interpretation and only certain criteria exist, but from what Resale Weekly has been able to ascertain, the general protocols are: machines and models not available or manufactured in South America can be imported; machinery used in the mining industry can be imported into South America; machinery may be manufactured in the country or region, with global business partners. This last has been exemplified by JCB establishing a large assembly plant in Brazil.
The South American economy is extremely buoyant at the moment, with international trade figures for 2011 showing Brazil achieving +5.1% sustained growth, placing it a strong second behind Asia at +7.1%. The Middle East and Africa achieved +3.5%; South America +3.2%; Eastern Europe +2.5%; North America +2.0% and Western Europe -0.5%. It is this strong Brazilian growth that has helped it become the world’s sixth largest economy by nominal GDP and it is widely expected to rise to fifth position in that table by the end of 2012.
Brazil is also one of the world’s fastest growing markets for construction equipment, with 15% annual growth currently projected. Large scale infrastructure projects already underway include the construction of 5000 km of highways, while significant residential projects and various major sporting events (FIFA World Cup 2014 and Olympic Games 2016) coming to the country over the next few years can only add to this.
The wider Latin America region is also buoyant, with four major initiatives worth an estimated US$30 billion in Colombia (including highways, seaports, airports, railways and river ways) and similar projects elsewhere putting the whole region firmly on the map for anyone with machinery and equipment to sell. The strength of this market also offers substantial opportunity for the right partners to create trade links with Brazil. However, the Brazilian market is unique, and it needs to be approached in a particular way, with a tailored strategy.
Demand for construction equipment and mining machinery is great, with buyers from South America looking for quality excavators and other specialised plant equipment, particularly from manufacturers such as CAT and Hitachi. JCB has also fared well in Brazil, due to the popularity and versatility of the JCB 3C backhoe, making it a firm favourite on infrastructure projects in the Brazilian interior where thousands of miles of secondary roads are currently being upgraded.
Many of the world’s leading brand manufacturers are already operating in Brazil, alongside Brazilian distribution or manufacturing partners. In terms of volume, the leaders are clearly Caterpillar and Case, with Caterpillar providing one in every five machines sold into Brazil. Brands like Volvo, Komatsu, New Holland, JLG, JCB, Genie, FIAT, and Hyundai are also strong ‘second tier’ brands. Another new entrant into the South America market is China; however it is too early for brands like XCMG, Sany and Liugong to compete with the leaders, having made no significant impact on the overall Brazilian market as yet.
Barriers to import do exist; however, with a clear understanding of the overall procedures and opportunities, it becomes evident what is acceptable and how to proceed.
The first barrier to entry in this region is a high import tax on foreign products, which includes construction, mining and agricultural machinery. With the economy booming, the Brazilian government has sought to boost the local manufacturing base by making the route to entry on imports somewhat prohibitive. There is complex tax legislation in Brazil that strives to protect local markets, especially production-based ones.
Brazil is, therefore, one of the most difficult countries in the world to do business with, a fact that makes local knowledge important. Partnering with a Brazilian organisation is perhaps one of the most preferable ways to gain access to such knowledge. Taxation is also a deciding factor when it comes to localisation, with benefits being made available for locating production facilities in areas where employment is most needed. Skill levels and labour costs in Brazil can also differ dramatically from place to place due to localisation. There are legal frameworks in place, though, to enable better understanding of these differences and to aid in project negotiation with the state government. In spite of the challenges, it is eminently possible to negotiate reasonable outcomes.
For those that do choose to operate in the region, providing new and used machinery to Latin America, there is strict documentation and general paperwork to be completed. Again, the arduous legislation behind these requirements is in place to protect the local economy. Once again, seeking assistance from a local business partner in order to ensure requirements are met is, therefore, a wise measure.
Government schemes backed by the Brazilian Development Bank (BNDES) encourage the production of new machinery and equipment locally to boost the local economy. Far from inhibiting foreign access, though, this scheme provides financing for collaborative ventures, and many of the major players in the market use it. Whilst import barriers exist, there are provisions that make it possible for certain types of equipment to be imported in to Brazil. Equipment without national production is allowed, with import duty exemption for specific equipment types as defined by the government.
Locally produced equipment, whether made solely by a local manufacturer or in partnership with an international associate or partner, is exempt, but will attract import tariffs in order to protecting the national supply chain. Machines such as excavators and backhoe loaders fall into this latter category.
Any machinery type that cannot be provided through the home-market manufacturing base may be imported. As already mentioned, the JCB plant and Brazil have recently embarked on a US$ 340 million alliance with Fiat to set up a construction equipment plant in Montes Claros, in the northern region of Minas Gerais. The fact that this will create 2700 jobs highlights the reason why Brazil imposes such stringent restrictions.
The considerations made by other global manufacturers of machinery as to where to locate their manufacturing bases have included easy access to the main customer base, as well as local infrastructure, local supply chain, transportation, labour costs, as well as the previously discussed taxation benefits. The current regions of Brazil that are proving popular for the reasons outlined include: Minas Gerais, Sao Paulo, Paranas and Rio Grande do Sul.
Written by Daniel Moffat.
Edited by Jack Davidson.
Read the article online at: https://www.worldcement.com/the-americas/04102012/latin_american_machinery_imports_market_017/