Competitividade e potencial do setor automotivo brasileiro

Seminrio AutoData Compras Automotivas 2010 O Desafio da Competitividade

So Paulo, May 17, 2010

Seminrio AutoData Compras Automotivas 2010.pptx

A. Brazilian automotive sales Attractive growth with even larger potential

Seminrio AutoData Compras Automotivas 2010.pptx

In 2010, Brazil has firmly established itself as a major global player

Top markets worldwide 2010 [m vehicles]
VEHICLE SALES
1 2 3 4 5 6 7 8 9 10 China USA Japan BRAZIL Germany France Italy India UK Russia 13.8 11.5 4.4 3.2 2.8 2.4 2.3 2.2 1.9 1.6 1 2 3 4 5 6 7 8 9 10

VEHICLE PRODUCTION
China Japan USA Germany Korea BRAZIL India France Spain Canada 13.3 8.2 6.8 4.7 3.3 3.3 2.7 2.1 2.1 1.9
Seminrio AutoData Compras Automotivas 2010.pptx 3

Source: JD Power; Roland Berger

To foster future production growth, Brazil needs to define a clear agenda

The Brazilian automotive industry at cross roads
PHASE 1:
Emergence of Brazil

PHASE 2:
Uncertainty and restructuring

PHASE 3:
Macroeconomic stability

POSSIBLE LEVERS TO ENSURE FUTURE GROWTH > Fostering of domestic sales to ensure sufficient and satisfying growth for all market participants > Increasing exports to build scale and compete on global level > Improvement of domestic competitiveness to translate sales growth into production growth for established player
2020
Seminrio AutoData Compras Automotivas 2010.pptx 4

Brazilian vehicle production [m vehicles] 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1988
1992

Which way forward for Brazil?

ESTABLISHED OEMs

GLOBALIZATION > New players > New products > New rules
2004 2008 2012 2016

1996

2000

Source: JD Power; ANFEVEA; Roland Berger

For the next decade, Brazil is forecasted to experience a period of attractive domestic growth
Brazilian expected automotive sales growth [m vehicles]
FORECAST BASED ON JD POWER
+3.6% p.a. 4.5 4.5

EXPECTATIONS OF MAJOR PLAYERS

> Based on the expectations from JD Power, Brazil shows attractive growth over the next years 4.2 4.3 4.4 > These outlooks are confirmed by the internal expectations of the OEMs > Volkswagen and Ford forecast 4 m vehicles sold by 2014, General Motors and FIAT foresee an even faster sales growth, expecting the 4 m sales mark to be achieved by 2013 resp. already by 2012

3.1

3.2

3.5

3.7

3.9

4.0

4.1

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

JD Power forecast
Source: JD Power; Anfavea; clippings; Roland Berger

Extrapolation
Seminrio AutoData Compras Automotivas 2010.pptx 5

Based on macroeconomic expectations, even higher annual sales seem feasible

Validation of vehicle sales forecast
FORECAST ANALYSIS BASED ON DIFFERENT INDICATORS [m units]
8.0 7.0 6.0 5.0 4.0 3.0 0.0

FINDINGS

> Based on regression analysis using automotive household spending power, disposable Disposable 2 = 85.7%) income (R income and nominal GDP, the JD Power forecasts appear in Automotive line in the short to mid term spending but too conservative in the power (R2 = 95.6%) long term Nominal > A sales forecast of signifiGDP (R2 = 91.8%) cantly more than 5 m vehicles JD Power by 2020 seems likely (extrapolation) > This sales forecast may require additional efforts and measures by the industry as well as the Brazilian government 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Seminrio AutoData Compras Automotivas 2010.pptx 6

Source: J.D. Power; EIU; clippings; Roland Berger

Joint industry-governmental actions could be undertaken to drive domestic sales growth in Brazil
Measure to drive automotive sales in Brazil
A Reduced cost of ownership to foster individual mobility
Brazil has one of the highest total cost of ownership values in the world tax burden, high financing cost and higher production cost in international comparison are the main reasons

Incentives to renew vehicle fleet

Fleet renewal programs have been utilized by governments around the world to stimulate local sales and production and enhance the fleet's technology

Improved infrastructure to accommodate growth

Brazilian transportation infrastructure is one of the worst in the world, showing high improvement potential significant investments are still complemented
Source: Roland Berger

CONTINUED DOMESTIC AUTOMOTIVE SALES GROWTH

Seminrio AutoData Compras Automotivas 2010.pptx

REDUCING TOTAL COST OF OWNERSHIP

Brazilian total cost of ownership is significantly higher than that of other major markets
Total cost of ownership1) Country comparison of mid-size vehicles [USD '000]
+37.6%

COMMENTS
> Vehicle total cost of ownership in Brazil is at least 37% higher than in other major automotive regions > Key drivers include both the higher production cost, significant tax burdens (both sales tax and annual taxes), insurance, etc. > In order to bring down total cost of ownership to other regions, significant improvements are required along all steps of the value chain

73.1

Consumer costs

35.6

53.1

51.7 22.9

47.2 25.7

46.7 40.0 27.4 22.2 36.5 13.9

28.7 Retail price

37.5 24.4

28.8

21.6 JPN

19.3 USA

17.8 MXN

22.7 CHN

BRA2)

IND

GER

1) The total cost of ownership analysis considers the retail price plus owner car spending during its first 5 years; 2) Maintenance costs were subtracted due to high subjectivity level
Source: Toyota countries web site; TCO analysis; Clippings; Roland Berger Seminrio AutoData Compras Automotivas 2010.pptx 8

REDUCING TOTAL COST OF OWNERSHIP

In many important aspects of the automotive value chain, production in Brazil is higher than Triad markets
Cost comparison automotive production Brazil vs. Europe

Brazilian cost structure better

> Significantly lower labor cost (even considering taxes and dues) > Higher flexibility of labor (short-term increase/decrease of work force) > Lower degree of automation

Brazilian cost structure worse

> Raw material (e.g., steel) significantly more expensive > Higher distribution cost due to poor road infrastructure and inefficient ports > "Custo Brasil" The extra cost of doing business in Brazil (bureaucracy, taxes, duties, etc.) > Lower leverage of platform scale effects compared to TRIAD markets >

The production cost of a vehicle in Brazil are at least equal to those in Europe Brazil is not a low cost country any more
Source: TCO; national associations; clippgings; Roland Berger Seminrio AutoData Compras Automotivas 2010.pptx 9

REDUCING TOTAL COST OF OWNERSHIP

Re-introducing the IPI rebate would include 7.7 m potential buyers, increasing sales by 488,000 p.a. until 2016
Brazilian TCO reduction measures
DEVELOPMENT OF HOUSEHOLDS WITH AUTOMOTIVE BUYING POWER [m households]
Vehicle sales p.a. [m vehicles] Impact of TCO reduction by 10% 4.2 59.0 0.5 7.7 4.7 66.7

TCO REDUCTION IMPACT

> A 10% TCO reduction would add another 8 m households to the new car market > Considering the current inhabitants per vehicle relation, the increase of the potential buyers would lead to additional vehicle sales of 488,000 per year 2.5 m vehicles over the 2010-15 period > A TCO reduction of 10% could be achieved both directly by reducing both tax burdens and indirectly by improving other cost drivers for the industry (e.g. bureaucracy), thus reducing the immediate investment volume required

3.2

1.0 9.7

49.3

2010

Growth 2010-2016

2016

TCO reduction impact

2016 with TCO reduction impact

Source: EIU; IBGE; Datamonitor; Roland Berger

Seminrio AutoData Compras Automotivas 2010.pptx

10

FLEET RENEWAL PROGRAM

Brazil has one of the oldest vehicle fleets in comparison with major automotive markets
Vehicle fleet age
FLEET AGE COMPARISON (GLOBAL VEHICLE) AVERAGE BRAZILIAN FLEET AGE [YEARS]
30.1
24%

28.6

26.1
40%

241.3
37%

196.3
33%

41.0
32%

100.0
28%

80.0 13%

9.6 9.2 Passenger vehicle fleet age 8.8

>10 65% years

<10 years 35%

60%

63%

67%

68%

72%

76%

88% 8.4 8.0

Russia Brazil

USA

EU-16

Germany

China1)

UK

Japan

2000

2004

2008

1) % of vehicles apt to participate of the 2010 government scrappage program based on pollution emission
Source: Estudo da Frota Sindipeas; national associations; clippings; Roland Berger Seminrio AutoData Compras Automotivas 2010.pptx 11

FLEET RENEWAL PROGRAM

Globally applied scrappage programs had an average adherence rate of 6.5% Similar scenario could be reproduced in Brazil
Scrappage programs figures Country comparison
Fleet renewal adherence rate [%]
10.3 Adherence rate2) 7.0 Adherence rate1) 4.5 Annual sales increase (for 5-years timeframe) 160,000 232,000 367,000 6.5 Total governmental cost (for 5-years timeframe)

Brazilian fleet renewal program

MINIMUM 4.5% BRL 6.3 bn AVERAGE 6.5% BRL 9.0 bn MAXIMUM 10.3% BRL 14.3 bn

Benefits offered by government include BRL 5,000 bonus and subsidized interest rate (4% p.a.) for the new vehicle financing China Japan Ger- Average many

1) Percentage of vehicles sold under scrappage program over old fleet 2) Considers the realization of 2 programs over the period 2010-2015, with the second program having 40% less adherence than the first one
Source: National associations; clippings; Roland Berger Seminrio AutoData Compras Automotivas 2010.pptx 12

Measures to increase domestic sales and a focused export strategy could drive yearly production to more than 5m vehicles by 2016
Forecast for national production RB analysis [m units]
0.3 0.7 0.5 0.5 TCO reduction 0.2 Fleet renewal program 5.1
+6.8% p.a.

4.1 3.2 1.0

2009 production volume

2010-2016 organic growth

2016 forecasted production volume

1
Upside sales potential

2
Increase in export volumes

3
Development of imports

2016 potential production volume

Source: EIU; JD Power; ANFAVEA; Roland Berger analysis

Seminrio AutoData Compras Automotivas 2010.pptx

13

Conclusion: Domestic production could be fostered significantly with the introduction of a joint industry-governmental agenda
Future development potential of automotive production in Brazil
Brazilian automotive production [m units]
6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Anfavea; JD Power; Roland Berger

Joint industry- governmental agenda

1
Upside potential: 1.7 m units

Achieve a joint understanding of the role of the automotive industry in Brazil Support future industry growth with TCO reduction, fleet renewal program, export support, etc. Improve long-term cost competitiveness of the Brazilian industry Define future technology focus, including powertrain mix (gasoline, ethanol, electrical, etc.)
Seminrio AutoData Compras Automotivas 2010.pptx 14

B. Implications for Brazilian suppliers Ample growth opportunities at home and abroad

Seminrio AutoData Compras Automotivas 2010.pptx

15

Over the last years, Brazilian suppliers showed a very positive sales development
Historic development of Brazilian supplier revenues [USD MM]
+17% p.a. 41,0
3,5

35,1
2,6

4,9 5,4

34,9
2,8 2,8 5,2

+ 21% 0% + 18%

28,5 25,3
1,8 2,1 5,4 3,4 3,1

4,6 4,8

18,5 Intra-sectorial Exports Aftermarket OEMs 13,3

0,9 3,1 1,9 7,4 1,3 3,9 2,5

4,7

27,2 23,1 15,6 17,6

24,2

+ 21%

10,9

2003

2004

2005

2006

2007

2008

2009

1) Faturamento com ICMS (Imposto sobre Circulao de Mercadorias e Prestao de Servios) e sem IPI (Imposto sobre Produtos Industrializados)
Source: SINDIPEAS; Roland Berger

Average annual growth

16

Seminrio AutoData Compras Automotivas 2010.pptx

Compared to global average, Brazilian suppliers performed better in terms of both growth and profitability
Financial performance of Brazilian suppliers compared to global suppliers
REVENUE [INDEX: 2003=100]
200 184 180

EBIT MARGIN [%]

9 8 7 6 5,3 4,7 5 125

Brazilian suppliers 7,6

6,3 5,1

8,3

Brazilian suppliers
150 133 119 110 100 150 152

167 141 129

163
135

6,1
5,0

5,7

6,0
5,0

~6 - 7

112

4 Series 3 2 1 0 -1

3,1 2,1 Global suppliers ~ -1,5 03 04 05 06 07 08 09

~3 - 4

100 Global suppliers

50

-2

03

04

05

06

07

08

09

10e

10e

Source: SINDIPEAS; Roland Berger

Seminrio AutoData Compras Automotivas 2010.pptx

17

In order to ensure long-term growth and competitiveness, four major lines of actions exist
Lines of actions for Brazilian automotive suppliers
1

Capture domestic growth by aligning positioning and product portfolio Develop local R&D capabilities to ensure global technological competitiveness Improve own cost position to defend domestic market share and grow globally Identify suitable growth opportunities abroad (organic and via acquisitions/partnerships)

Source: Roland Berger

Seminrio AutoData Compras Automotivas 2010.pptx

18

DOMESTIC AUTOPARTS GROWTH

Significant growth potential between 10 and 21bn USD can be captured by autoparts suppliers in Brazil
Future business potential for automotive suppliers in Brazil [bn USD]
21.3 Delta + 11.5 48.5

KEY DRIVERS > Domestic vehicle production volume > Global automotive mega-trends with impact on Brazil Increasing fuel efficiency and CO2 reduction Increasing comfort and convenience requirements Increasing safety requirements Affordability > Annual savings and price-downs
Seminrio AutoData Compras Automotivas 2010.pptx 19

9.8

37.0

27.2

Current suppliers revenues 2008

Conservative growth projection 2008-2020

Aggressive growth projection 2008-2020

Minimum Maximum Expected long-term revenues (2020)

Source: Roland Berger market model

DOMESTIC AUTOPARTS GROWTH

Most growth exists in Powertrain, Exterior and Interior applications for Volume and Low-end vehicles
Expected supplier growth by domain and segment [m USD]
Powertrain
1,3 2,7 2,8 6,0 5,7

2,7 6,6

0,0

Premium

0,2 4,0 9,1

Chassis

Volume

Exterior

Low-end Interior
0,2 0,4 2,8 5,5 0,0 1,8

10,3

Low-cost

Infotainment

Conservative growth
Source: Roland Berger market model

Aggressive growth
Seminrio AutoData Compras Automotivas 2010.pptx 20

LOCAL R&D CAPABILITIES

Brazilian suppliers struggle to provide sufficient R&D capacities and capabilities

R&D position of Brazilian suppliers
R&D spendings (%of revenues)
Low

R&D approaches by global OEMs in BRIC

1 2 3 Manufacturing engineering

Ability of Brazilian suppliers

   ( )  # #

3,1%

Localization & local sourcing Local product adaptation Offshoring of engineering services Local R&D hub with platform/ module development Research collaboration

2,2% 1,8%

4 High R&D intensity 5 6

0,5%

Passenger OEMs in Brazil

Source: Roland Berger

CV OEMs in Brazil

Brazilian suppliers

Global suppliers

Seminrio AutoData Compras Automotivas 2010.pptx

21

IMPROVE COST POSITION

Brazilian labor costs are lower than in developed countries, but are still high when compared to other developing countries
Hourly compensation costs of production workers in manufacturing 2007 [USD]
x5.3

COMMENTS
> Hourly compensation costs includes direct payments as well as social insurance expenditures and labor taxes > Labor cost within the automotive industry are often higher, but the difference between countries remains similar > In recent years, labor cost in Brazil have shown a rapid annual growth percentage-wise as high as in China or India, but from a higher base level

37.66

24.59 19.75 16.02

x3.4

5.96 2.92 GER US JPN KOR BRA MXN 1.34 CHN 1.10 IND

Source: Steelonthenet.com; Bureau of Labor statistics; Roland Berger

Seminrio AutoData Compras Automotivas 2010.pptx

22

GROWTH OPPORTUNITIES ABROAD

Brazilian suppliers have achieved significant market share in many products Further growth opportunities exist abroad
Global growth potential for Brazilian suppliers
Market share of local (Brazilian) suppliers selected products
Brake pads and linings Chassis systems Shock absorbers Insulation systems Mirrors Steel wheels Aluminum wheels etc. 50% 70% 65% 65% 65% 60% 62% Infotainment Interior Exterior Chassis Powertrain 584 17 126 146
78

Global growth potential World-wide autoparts revenue [bn USD]

+ 345

927 22
190

221
115

379 217 2008 2020

23

Source: Roland Berger market model

Seminrio AutoData Compras Automotivas 2010.pptx

Final conclusions and summary

Competitiveness and potential of the Brazilian automotive sector

1 2

Brazil has tremendous growth potential A joint industry governmental agenda is needed to maximize this growth potential Brazilian suppliers need to improve their technological and cost position to compete long-term on a global level Act now The only thing that should not be done is to do nothing!

Seminrio AutoData Compras Automotivas 2010.pptx

24

Your contact for further questions

STEPHAN KEESE Principal Phone +55 11 3046 7111 stephan_keese@br.rolandberger.com

Seminrio AutoData Compras Automotivas 2010.pptx

25