roland berger brazilian construction equipment market 20110414

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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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22011-04-14_Market_Entry_Strategy Brazil.pptx

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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32011-04-14_Market_Entry_Strategy Brazil.pptx

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 Acelerao 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