Racing to Brazil

23 August 2012

Brazil’s historically unpredictable approach to infrastructure means it has to gear up for the 2016 Olympics and the 2014 World Cup. Kevin Walsh looks on as the crane industry lends a hand.

With more than 12,000 infrastructure projects due to be completed by 2016, funded by BRL959bn (USD474bn) of Brazilian government spending over three years, there's never been a better time for the crane industry in Brazil. Extra public spending on building projects is being matched by a government programme, Finame, aimed at making it easier for local manufacturing companies to borrow cash.

Even with a massive BRL5.7bn (USD2.8bn) being spent on upgrading sports stadiums for the two impending tournaments, the real prize for the construction industry has always been work involving Brazil's aged infrastructure network.

Thanks to the second phase of the government's growth acceleration programme (PAC), first introduced in 2007, public infrastructure in Brazil can expect to benefit from around BRL751bn during this and next year, with 21% of the total funds already spent in 2011.

This mountain of opportunity has resulted in a strong international spotlight on Brazil, as a number of crane manufacturers and rental companies strengtheni any existing roots in the country. Manufacturers such as Manitowoc, Terex, XCMG and Sany have all invested in new production facilities in the country over the last couple of years, and with markedly little domestic competition, are vying for dominance in the market.

Even manufacturers without production facilities in the country are claiming their fair share of the generous demand. Link- Belt, for instance, has sold seven rough terrain cranes with capacities ranging between 90t and 30t over the last few months.

And even with this performance, the company has decided to swap its former dealer for an agent with a much broader coverage of the country, Brasil Máquinas de Construção (BMC), which it announced in at this year's M&T Expo in São Paulo.

The size of this agent, the company says, is more in step with the scale of Link-Belt's plans for the country. Its new dealer already has partnership agreements with XCMG, Shantui and Zoomlion to sell various construction plant, and has established a strong position in Brazil since its founding in 2007.

However, a major obstacle for foreign crane manufacturers aiming to get the most out of Brazil are its complex tax system and protectionist government financial policies, which can make importing products into the country unpredictable and costly.

Explaining the company's strategy for Brazil, Link-Belt marketing manager, Bruce Kabalen, says, "A lot of it is going to be based on the local machine population, what's the potential down here in terms of sales, the potential of BMC, and a lot of it is going to be left to the Brazilian government and how they handle importation.

"The Brazilian government is talking about letting more construction companies come in, but they haven't made it easy for them yet. A lot of the contractors' hands are tied until they allow them to start on projects."

Charity starts at home
But for two of Link-Belt's US-based competitors, the opposite approach seems to be the way to go. Both Manitowoc and Terex announced their first cranes were assembled in Brazil at M&T Expo 2012, the 60t RT765-2 and the 50t RT 555 Progress respectively.

For each of these cranes, 25% of the machine is constructed from locally sourced parts, drastically reducing the amount of import tax the manufacturer pays the Brazilian government when compared to importing a finished crane. But neither company is satisfied with this, aiming to avoid import taxes altogether by manufacturing the entire crane in Brazil, and investing heavily in facilities to do so.

Local production also conveys another advantage on the manufacturer: generous credit facilities to companies via the Brazilian government's National Development Bank, BNDES.

Through the bank's 'Finame' scheme, if at least 60% of a manufacturer's product (that is to say 60% of the value of the product as well as 60% of the weight of the product) is constructed from locally manufactured components, then not only are import taxes reduced, but finance availability for expansion is available at rates far superior to those typically available. This can create a significant advantage over manufacturers that import.

Manitowoc's general manager for its Brazilian operations, Mauro Nunes, says: "We built a factory here and we started to develop some local suppliers. We now build 25% of the total crane in weight and value locally, so it means we won't have any problems assembling the crane here.

"Currently 25% of the crane assembled is Brazilian made and 75% US made. Our plan is to reverse this in three years maximum. That is our commitment with BNDES, the government bank. They have a special credit line for finance. It's good for helping customers to build machines, like cranes, and use this credit line for finance for five years, with a one-year grace period and an interest rate of 5 to 5.5%."

However, finding local suppliers capable of fabricating parts to European or US standards isn't always so easy, as Terex president for Latin America, Jacob Thomas explains.

"It's not an easy decision to set this up. What components can you get? A lot of it depends on the supply chain that you have here. A lot depends on the volume that you have here, because the volume has got to be cost-effective for the local supplier to produce it here.

"If everything goes well the RT should be meeting the content requirements (for Finame) by the end of this year, or first quarter next year at worst case. We are also constantly looking at the other products to see what makes sense."

Both manufacturers choice of an RT as the first crane type to be assembled in Brazil reflects a growing demand for this crane type. At M&T Expo 2012 Manitowoc announced the purchase of 16 RT765-2s by special transport and project lift specialists Makro Engenharia, as part of a deal also including 20 all terrain cranes.

Currently working across Brazil with over 150 cranes on projects ranging from a stadium in Fortaleza to a Petrobras oil refinery, Makro Engenharia's commercial director, David Rodrigues, says the RTs are a vital tool to deal with burgeoning demand.

"In our fleet we have mainly ATs and some crawlers, now we are investing in RTs. We had 11 or 12 already that we bought before this package.

"There's a big demand for RTs now. Within the last two years it started, but it's really picking up now because of the infrastructure investment that is going on in Brazil. Rough terrains are very good machines for infrastructure projects in general."

Rodrigues explains that a large part of the decision to buy cranes from Manitowoc was the company's construction of the new facility in Brazil.

"As we have talked to them over the last few years they have made a very strong investment in Brazil. They have a complete staff here with all of the infrastructure needed to support the clients here, so not just the new factory but the warehousing, spare parts, sales guys, technicians. That's a big thing because five years ago that was not here for Grove, there were only Grove dealers.

"Makro never bought from Grove dealers in Brazil, we had done other business with Liebherr, and the only reason was because they had factories and had all the infrastructure. Once Manitowoc started to make serious investments in Brazil we put them on the same level of negotiations."

No compromise on quality
Despite being one of the earliest crane manufacturers to build factories in Brazil, back in the 1970s, Liebherr has opted not to join Terex and Manitowoc in their search for the ideal Brazilian component supplier for mobile cranes.

This is not simply because the company stopped producing RT cranes in the late 1990s -- in favour of an expanded line of all terrains and compact cranes -- but because of the all-important component supply issue.

For Liebherr's telescopic mobile cranes, the availability of high-quality steel has proven to be the limiting factor preventing the company from finding a cost-effective method of manufacturing locally.

Liebherr's area sales manager for mobile and crawler cranes, Georg Reinbold, explains: "The capacity to build mobile cranes in our Brazil facilities is there, but the problem we have in Brazil is the steel quality. We do not get the proper steel quality in order to manufacture our mobile cranes here, especially for the telescopic boom. We use a very special type of steel which, for the time being, only two manufacturers in the world are able to make and therefore we don't find this type of steel in Brazil. This is the reason we keep our production in Germany.

"We already ran some studies on producing here but the result every time was it was cheaper for the end-user if we import the machine from Europe rather than producing or assembling it locally."

While Terex's RT 555 Progress is currently being produced as a complete knockdown (CKD) kit -- until the remaining suitable suppliers are found to enable full manufacture of the crane in Brazil -- for Liebherr, without the same end goal being available because of the lack of higher quality steel, this process is more expensive than manufacture in Europe and importing due to customs clearance costs and taxes.

However for Liebherr tower cranes in Brazil there is a markedly different story to be told. The most striking exhibit on the Liebherr stand at M&T Expo was the 160 EC-B 8 Litronic, which is also the first Liebherr tower crane to be manufactured in Brazil.

This will be a boon for Liebherr, not just because of the access to Finame funding hitting the '60% manufactured in Brazil' mark but because of Brazil's current boom in the residential construction market, powered by infrastructure spending and government housing policy.

Under the government social housing programme 'Minha Casa, Minha Vida' (My home, my life) targeted at an estimated 5.5 million households living in poor quality and overcrowded houses across Brazil -- largely in the poverty-stricken favelas -- two million new homes are to be constructed by 2014.

Terex is also taking advantage of these social housing programmes having recently taken an order for 76 tower cranes from Petroleos de Venezuela (PDVSA) for a 50,000-unit development. Thomas says: "It's a good market. We're working this market and developing it. We had a very big order in Venezuela, very recently with Petroleos de Venezuela. So it's a good market for tower cranes, a growing market for tower cranes.

"We're trying to develop the selferecting crane market. We believe that there's a niche for the demand there."

Terex will likely face off against at least one domestic competitor when developing this market, namely Montarte, based in Santa Isabel near São Paulo.

For smaller tower cranes, like those made by Montarte, construction projects do not need to be so large scale to ensure its latest product's suitability.

Since the 44-year-old company began producing the 1t capacity G10-06 in 2011, after patenting its design, the crane has sold well, with 40 units sold in just the month of May 2012.

The crane features a 6m boom and reaches a maximum height of 150m. It is intended for use inside a building as it is constructed. It features a unique trolley system as part of its design that allows the crane to be jumped up through the building with minimal effort.

This allows the crane to be used with just seven mast sections, progressively working its way up through the building to assist materials handling on each floor of the building as work progresses. Montarte claims this is the safest crane of its size in Brazil.

Bubbling to bursting point?
Although Liebherr may be ready to take full advantage now of the demand resultant from such housing programmes, those who follow may find the situation somewhat changed in the coming years.

Brazil's much-vaunted and rapidly growing middle-class has begun to find itself heavily indebted, thanks to high interest rates on consumer lending, even though these are lower rates than have been seen in the country in many years.

According to credit consultancy Serasa Experian, there has been a significant 19.1% year-on-year increase in the number of Brazilians that have taken out bank loans but defaulted on repayments during the first half of 2012.

In addition to this problem, the government's imposition of a BRL130,000 (USD64,182) maximum property value of the housing being built is squeezing developers' margins, resulting in poor quality housing in some cases and project delays or cancellations in others.

As a result, the Brazilian public is less willing to take on more debt for such housing, where it exists, and developers are less willing to take on these projects, which could eventually impact on the demand for cranes.

However, the amount of new infrastructure needed across Brazil, not least in the Northeast of the country where work is underway on a petrochemical plant, the Atlantic coastal highway, the southern hemisphere's largest shipyard and a new 1,728km railway.

The railway is being built by Brazilian contractor Odebrecht, who signed a contract with Manitowoc at M&T Expo 2012 for 13 Manitowoc cranes.

Among the cranes purchased in the deal were four crawler cranes, a much more regular occurrence now that the pace of infrastructure investment is picking up.

Terex's Thomas says: "Crawlers are virtually non-existent, very, very small demand in Brazil. I see some growth in crawlers as the size of the profits increase further down the road, but today it's not so significant. If there's any shift you might see a little more focus on crawlers in the future."

It has been a similar story for Liebherr, with the company reporting sales of eight crawler cranes last year. In keeping with this view Sany Brazil sales manager Elton Lima says the manufacturer will have 12 crawlers in Brazil for sale this year, and has ordered another three crawler cranes to add to the nine brought into the country already. Even smaller Chinese firms like Hefei have begun bringing in crawlers, showing faith in the growing demand.

Companies like Makro Engenharia lend credence to this view. Commenting on the company's next planned investment, Rodrigues says: "The next thing is going to be a package for crawler cranes, that's what we're talking about with Manitowoc now. We just closed the deal for the ATs and the RTs, and now we have the demand for the crawlers we will talk with Manitowoc about that. We currently have 12 machines and we need to expand more than 10 units."

Zoomlion's Brazilian dealer Sermaquinas has sold ten crawler cranes in Brazil since the company was set up three years ago. The firm has sold 220 cranes in that time, and one of its owners, Francisco Teixeira De Goeye sees enough promise in coming infrastructure work to keep investing in Zoomlion cranes, particularly crawlers.

He says: "The World Cup and the Olympic Games in Brazil it's the cherry on top of the cake, because all the infrastructure, the oil and gas, the energy, all these big projects will be demanding the machines.

"To build up a stadium that only needs a few machines takes care of that. There's huge projects going on in Rio de Janeiro involving oil and gas, there's some energy projects, like refineries, infrastructure projects such as ports, airports, roads, railways, bridges. This is the biggest part of the cake, and that's probably where our customers are, where our machines are going."

As someone has worked in international commerce for over a decade in Brazil, De Goeye recognizes Brazil's typical boom and bust cycle is currently in an upswing, but is concerned that without careful management by the government all the good work this time around could still come to an abrupt halt.

"I know the bureaucracy that is involved in imports and exports in Brazil quite well. My opinion is that Brazil is still a very closed country compared with European countries and compared to North America we are far, far away in terms of opening our borders, globalisation. Brazil still has a mindset, better suited to 20-30 years ago, of protecting the national industry.

"Brazil is still using the same strategy it was using many years ago, so it needs to move, it needs to change and start thinking globally. They need to open the borders, and the discussion that is going on right now is that the government is doing only minor changes, but they need to do the major, fundamental ones.

"They need to make a completely new tax policy, because our current taxation policy was made 50 years ago for a completely different scenario from what we live in today. But tax is a big issue.

"Brazil is still controlling import taxes, so when the local industry complains that Chinese products are hurting them, the government simply increases the import tax and that's it. But that's not what we need.

"We need a new tax policy in Brazil that can generate a better environment for national industry, without simply making the Chinese products more expensive when they arrive here.

"We need more powerful changes, deep changes to better deal with the situation we face today."

An RT765-2 and a Grove 6300L: The RT765-2 is Manitowoc's first rough terrain assembled in Brazil
Link-Belt Hamilton Bogado-BMC, Chuck Martz-Link-Belt, Christiano Kunzler, BMC
Liebherr's first Brazilian made tower crane, the 160 EC-B 8 Litronic behind a LTM 1090-4.1
One of the Zoomlion 260t QUY crawlers sold by Sermaquinas
The newly developed G10-06 tower crane from Montarte, a Brazilian manufacturer which produces tower cranes.
Terex’s RT 555 Progress launch
Sany’s stand at M&T Expo