Brazil’s trailer market: Work in progress

Ranked as the world’s seventh* largest economy, Brazil has become the place to source new business in Latin America. But the promised economic juggernaut is struggling to develop an up-to-date commercial road transport sector, as infrastructure development continues to lag behind.

Joining Russia, India and China as the fourth BRIC country, Brazil is more than just a lucrative investment option – it is one of the world’s most buzzing marketplaces and South America’s most promising logistics environment.

Compared to the top-three economies poised for progression in 2012 – Niger, Iraq and Angola are all set to clock in double-digit growth – Brazil may not stand for unlimited growth anymore, but it still is a burgeoning marketplace.

Until 2010, Brazil was dancing to the beat of rapidly increasing commercial growth, anchored by a strong commodities export market that totaled US$199.7 billion by the end of the decade**. Fuelled by the commodities boom, a growing middle class and important mineral wealth, Brazil’s economy hummed along with a 7.5 per cent growth rate.

Today, the tide has changed. The economic downward trend has not failed to leave a mark on the domestic economy and analysts are now pegging gross domestic product growth at 3 to 3.5 per cent. Fellow BRIC member, China, will achieve some eight per cent***.

But, there still is a surge of optimism that Brazil will bounce back, and the government is already taking action to stimulate and strengthen the economy – including a mix of tax cuts, interest rate reductions and more relaxed bank lending requirements.

The most immediate question for the local transport industry is whether such action will fuel spending or prompt the industry to delay plans for investment. According to the Institute for Applied Economic Research (IPEA), the answer depends heavily on how the debt crisis in Europe is resolved. “The future behavior of Brazil’s GDP depends on the outcome of the crisis in Europe and the behavior of the world economy,” an IPEA report concludes. “Nevertheless, the country still has solid fundamentals that will permit rapid recovery.”

One such fundamental is the country’s transport equipment sector, the main export next to iron ore, soy, footwear and coffee. “We expect a sector-specific growth of five per cent, but any negative sign in the global economy could mean an immediate impact on the industry,” says Rogerio Ramos of SAF-Holland do Brasil. The US-German corporation has extensive experience in the local market and is closely observing the developments in Brasilia, knowing that the EU crisis could slow down foreign investment and decelerate growth.

But since the Eurozone is in the process of implementing tough new debt and deficit rules for its members – which take a step towards a closer fiscal union to support the monetary union – Ramos is convinced that the transport sector will have all the backing to play a major role in the national quest to recovery, which is expected to pick up pace during the second quarter of 2012.

One reason for such optimism is Brazil’s prime location in South America. Forward-thinking supply chain executives have long noticed Brazil’s potential as a powerful logistics outpost located on the periphery of the vast US distribution network. If they keep investing in Brazil – and if the country will continue to invest in infrastructure development – domestic demand for trailing equipment is bound to rise.

At the moment, though, Brazil’s severe lack of infrastructure still is a key issue, says local business journalist Andréa Novais. After all, money is still tight, forcing the government to hold back on public spending for road construction projects. But to boost the economy, reducing official investment will not improve the situation. “Just to give you an idea, a truck can face a line of 150km before loading or unloading cargo at a port,” says Novais in a Brazil Business report.

The resulting threat to the country’s commercial road transport market is immense – as is the accumulated backlog. An estimated 69 per cent of the Brazilian road network is in a questionable condition, while 60 per cent of all cargo is transported by road, according to Brazil’s National Association of Manufacturers of Highway Equipment, ANFIR. “The most damaged roads are those located in the north and northeast of Brazil,” says Novais, pointing out that the lack of road quality could cost Brazil valuable time to recover.

According to Novais, most Brazilian roads are typically narrow and bumpy, and many lack proper signage. One example is the country’s major road transport artery, the 3,632km-long BR 101, renowned to be the ultimate testing ground for transport equipment. And the famous Transamazônica road (BR 230), which inaugurated in 1972 as an attempt to connect the North of Brazil to the rest of the country, still has 2,200km of unpaved road. It only operates six months a year, as the unpaved section becomes almost inaccessible during the rainy season between October and March.

But it’s not just road quality that could mitigate the bounce-back to old accretion; it’s road safety as a whole. “Road safety in Brazil needs improvement regarding both legislation and surveillance,” says Ramos. “I believe that if we had a bit more scrutiny here, including a policy that determined a limited lifetime for commercial vehicles on the road, we would certainly have fewer accidents and improve safety.”

As a result, the local trailing equipment industry has decided not to wait for state-infused progress anymore and made a virtue out of necessity long ago – by creating a modern, safe and more durable portfolio. “The market is changing in search for better quality and better technology,” says Ramos. “In the past, Brazil’s transport industry used to be characterised by a traditionally engineered, low-cost product range. Now the focus is on combining build quality, safety and efficiency while maintaining a competitive price.”

A good example is the recently imposed National Traffic Council’s resolution, forcing tri-axle semi-trailers to use at least one self-steering axle – besides being fitted with air suspension. This shift does not only allow each semi to carry more freight – up to 10 tonnes per axle – but will also improve the issue of weight distribution and thereby reduce damage to the marred road network.

But the paradigm shift has only just begun. Reflective tracks, side shields and ABS/EBS are now compulsory or will soon reach that status, and the market itself is asking for modern technology such as air suspension, disc brakes or LED lighting. The growing demand of tippers and specialised equipment, ANFIR reports, will further boost diversification within the industry.

Therefore, trailer-specific market data does not reflect the general slowdown in GDP growth. Whilst Europe is facing a year of stagnation – German GDP, for example, will rise by 0.3 per cent in 2012 according the IMF – the change to an innovation-driven trailing equipment production is likely to keep Brazil’s transport sector on track. According to UK-based consulting group CLEAR, trailer demand reached 49,857 for the period between January and October 2011 – equating to a 6.5 per cent increase compared to 2010. “We are looking at a market size of about 60,000 trailers per annum,” says CLEAR CEO Gary Beecroft. “And as Brazil continues to export transport equipment, production could reach 80,000 by 2015.”
Beecroft predicts solid commercial vehicle demand well into 2012, indicating pent-up replacement needs and improved financial performance in the fleet sector, supported by improved credit availability as a result of current economic policies.

The logical question is, how long the market will be able to resist the adverse economic development outside Brazil? Neil Shearing, an emerging markets economist at Capital Economics, told Bloomberg that the strength of exports is unlikely to be sustained with China’s economy slowing and Europe struggling.

“Therefore it is even more important to be innovative and offer high-quality equipment,” says Ramos. “It is our first priority to safely reduce the weight of each trailer, bring top-shelf materials into the country, and also reduce maintenance costs.” Global companies like SAF-Holland have already recognised the market’s changing character and set up successful co-operations, backed by solid corporate structures and modern R&D departments.

According to Brazil expert Ramos, only strong, independent companies can meet the market’s ever-changing requirements – presenting a challenge to the local industry, and a wealth of opportunities to the global competition. “Only businesses who invest in state-of-the-art technology and can guarantee a certain level of manufacturing quality will succeed in this environment. International credibility and experience can be a useful selling point in this phase.”

Brazil’s trailer manufacturing industry is now wondering whether suppliers will be able to keep providing adequate components to sustain healthy growth, as classic outsourcing is a relatively new development in the scene. To date, the manufacturer that has been best able to meet its own needs has had an inside track on meeting its customer requirements.

Randon, for instance, has been able to capitalise on the ability to produce all equipment needed to build a trailer in-house. Based in Caxias do Sul in Brazil’s southernmost state of Rio Grande do Sul, the 63-year-old company has grown into a conglomerate containing a vast number of companies, making it the largest trailer manufacturer in Brazil and one of the largest in the world.

Among the components Randon produces are trailer axles, drums, hubs, air brakes, brake chambers, slack adjusters, suspensions, landing gear, fifth wheels, kingpins, refrigeration units, curtains, and even rail gear for bimodal trailers.

But with Latin America’s accelerating pace of change, even giant one-stop-shops like Randon now enter partnerships with other companies – despite an imminent fear that stems from a weak legal environment and a lack of security. “Many companies are slow to outsource because they don’t want to trust inventory management to a company they don’t know,” Inbound Logistics reports. “There is, however, growing indication that outsourcing anxieties in Latin America are wearing off.”

Randon, for example, has now established alliances with a whole range of globally renowned companies, including Meritor and Carrier Transicold from the United States and Jost Werke AG of Germany to outsource expertise and access new technology.

Randon rival, Guerra, meanwhile, has made in-house innovation its key priority, focusing on an advanced air suspension system that can offer increased stability, additional load capacity and reduced wear and tear. The company also offers a state-of-the-art disc brake system and has begun using polypropylene instead of wood and metal. “The polypropylene got us away from using wood from trees and allows us more flexibility with designs,” Marcos Guerra, Commercial Marketing Director of the eponymous company says in an interview with Industry Today.

But Guerra is not the only local company that has realised that using modern building materials can provide a significant competitive advantage. Aluminium giant, Alcoa, for example, worked with local trailer manufacturer, Sergomel, to develop a fuel-efficient aluminum transport in cooperation with the Sugarcane Technology Center, the industry’s research and development group based in Brazil. Thanks to aluminum extrusions in the body and aluminum wheels, the Alcoa solution is about 35 per cent lighter than its steel counterpart – a seven-tonne weight reduction that will boost payload while consuming seven per cent less fuel.

Sergomel Product Engineer, Adriano Terra, says, “with changes in the market and the competition, we’re in a constant search for solutions for the sugar and alcohol market. It is important that we partner with major companies like Alcoa to create these solutions.”

It’s a sweet time for Guerra as well, which is ready for growth with economic and ecological solutions that can drive Brazil into the future. “Our growth in this segment is almost 20 per cent and we see this continuing for the next several years,” says Guerra. “We have tanks for transporting the alcohol and fuels, plus trailers for moving sugar and sugar cane.”

Ironically, what raised a need for such innovate equipment and thereby fuelled change in the industry – a neglected road network – is now putting a strain on growth as construction cannot keep up the pace of technological progress. But upcoming events such as the Soccer World Cup and the 2016 Olympics (see breakout box) are now bringing some much-needed attention to infrastructure development again. And while infrastructure growing pains may remain cause for pause, experience has shown that the trailer sector will find a way to deal with such obstacles. After all, Brazil has a viable and hungry consumer base that is luring manufacturers and retailers to expand, and if the government’s recent corrective actions are successful, they will boost the transport sector as well. It is not for no reason that ANFIR and CLEAR expect the country’s trailer market to grow by five per cent growth rate in 2012 after a mere 0.25 per cent in 2011.

 

*based on Purchasing Power Parity or PPP GDP (2010). Source: Economy Watch

**Source: Economy Watch

***Estimated value. Source: Market Watch

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