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Brazil in the

Automotive
World

Brazil: Economic Overview

5th Largest Country in the world (by total land area and by population)
Worlds 6th Largest Economy: GDP~USD 2.4T just ahead of the UK
World Bank: U.S. GDP USD 14.6T; China USD 5.9T; Japan USD 5.5T; Germany USD 3.3T; France USD 2.5T

Diversified economy: global leader on several commodities (mining, agricultural) yet


with a sizable and diversified manufacturing base, strong oil and gas industry (global
leader in offshore drilling), and a very strong financial services industry
Economic reforms and stability enabled the rise of a middle-class: pent up demand and
consumer boom. Additionally, Brazils economy is riding the worldwide boom in raw
materials driven by Chinas emergence
Brazil reached investment grade (first in 2008 - Standard & Poors and Fitch)
Energy Matrix: Primarily Hydro, followed by Thermo (including Biomass and Fossils),
and minimum Nuclear. Expansion through private producers and secondary market.
Brazil is in the middle of a catch-up campaign in infrastructure investments
Brazil will host the FIFA Soccer World Cup in 2014 and the Olympic Games in 2016
Recent discover of new deep-sea Oil reserves (pre-Salt) and continued development of
Ethanol fuel. Self-sufficiency and excess reserves impact geopolitics
Brazilian Companies are increasing their presence around the globe

The long-awaited rise of Brazil

EM Equity in Two Decades: A Changing Landscape,


Goldman Sachs, September 8, 2010

Brazil to the Automotive World

According to Goldman Sachs projections, Brazil


could have the world's 4th largest economy by
2030.

The long-awaited rise of Brazil

estimated 39.5 million Brazilians


[Anclimbed
to the middle class between 2003 and May 2011... Currently,

105 million Brazilians belong to a rising middle class, with household


income in the range of US$9,000 to US$38,748 per year

Brazil to the Automotive World

Almost 40 million Brazilians climbed


to middle class in the last eight years
MercoPress, 28 June 2011

The long-awaited rise of Brazil

private economists forecast that the country will have to spend


[Some
some $700 billion to a trillion dollars to get roads, airports, sewers and

Growing Middle Class Fuels Brazil's Economy,


CNBC.com, 28 Apr 2011

Brazil to the Automotive World

sports facilities ready for both


the 2014 World Cup and the 2016 Olympics.

Brazils Challenges
Overall key challenges ahead
Restructure Fiscal Budget (shift to
capital versus current expenditures)
so as to permit sustainable reductions
of interest rates
Resolve infrastructure bottlenecks
(stressed by global sporting events)
Execute significant tax/labor reforms
Contain the rise of organized crime in
urban areas, and
Further reduce the country's wide
income inequalities.

Brazil to the Automotive World

Brazilian Demographics
In the last 10 years: demographics boom

Age

2010 (%)

Age

100+

100+

95 to 99

95 to 99

90 to 94

2000 (%)

90 to 94

85 to 89

85 to 89

80 to 84

80 to 84

75 to 79

75 to 79

70 to 74

70 to 74

65 to 69

65 to 69

60 to 64

60 to 64

55 to 59

55 to 59

50 to 54

50 to 54

45 to 49

45 to 49

40 to 44

40 to 44

35 to 39

35 to 39

30 to 34

30 to 34

25 to 29

25 to 29

20 to 24

20 to 24

15 to 19

15 to 19

10 to 14

10 to 14

5 to 9

5 to 9

0 to 4

0 to 4

Men
Source: IBGE

Brazil to the Automotive World

Woman

Men

Woman

Brazilian Demographics
By 2050, at least 30% of the population will be at least
60 and life expectancy will reach 81 years of age.
Challenges current and future
Health expenditures and costs tend to
rise
Social security system will have to
undergo further reforms, as it is
already in a significant deficit which
tends to increase
Source: IBGE

Brazil to the Automotive World

Brazilian household income


The average income per capita started growing in 2004
after a period of stagnation Inequality of income distribution in Brazil
decreased 5.6% and the median real
income rose 28% between 2004 and 2009.
Average income per capita BRL per month

Lowest unemployment (5.8%) since 1970.

28%

Unemployment - %

800

Source: IPEA

Brazil to the Automotive World

Jul-11

Dec-10

2008 2009*

May-10

2007

Oct-09

2006

Mar-09

2005

Aug-08

2004

Jan-08

2003

Jun-07

2002

Nov-06

2001

Apr-06

Sep-05

100

Feb-05

200

Jul-04

300

Dec-03

400

May-03

500

Oct-02

600

Mar-02

14
13
12
11
10
9
8
7
6
5
4

700

The Brazilian Banking System


Strong sector historically continues to boom
Brazilian credit /loan volume and market interest rate
Significant

credit
growth with positive
impact on the economic
activity
Still interest rates are
amongst the highest in
thr world

140 0

90. 0%

80.3

80. 0%

68.4

120 0

67.3

70. 0%

60.4

100 0

49.7

57.2

50. 0%

45.8

44.4

600

44.1
969

400

200

136

170

249

2003

2004

2005

337

481

1147

708

669

40. 0%

30. 0%

20. 0%

10. 0%

0.0 %

2006

2007

Brazilian credit and loan volume (USD bn)


Source: Falke Information

Brazil to the Automotive World

60. 0%

800

2008

2009

2010

2011*

Interest Rate (yoy % change)

* values from August 2011

Investments in Brazil
Positive outlook for investments

Expansion of the economy in 2012 will


be led by investment, which Issue/trend
will grow
more than household consumption. This
situation will contribute to sustained
growth in the country's productive
capacity.

According to the BNDES, investment


growth in core segments of
infrastructure is expected to be
substantial over the next years (54% for
the period 2011-2014). Industrial
investment plans are also considerable
(59% for the period of 2011 - 2014), Oil
& Gas and Chemical sectors being a
highlight.

Energy and Telecom are important


elements of the infrastructure
improvements that the country is
Source: Ministry of Finance
required to perform in the next years.

Brazil to the Automotive World

Source: Brazilian Central Bank

Investments in Brazil
Strong FDI from diversified inflows
Foreign Direct Investments - Inflows
70

Issue/trend

USD Billion

60
50
40
30
20
10
0

Source: Brazilian Central Bank

Brazil to the Automotive World

Foreign

Direct
Investments are
expected to achieve
USD 55 billion in 2012,
according to Brazilian
Central Bank.

Investments in Brazil
Strong FDI from diversified inflows

FDI per sector (Jan-Jun/11)

Issue/trend
Coque, oil &
biofuels, 5%

Other industry,
12%

Food , 4%
Non-metallic
mineral, 9%
Metallurgy, 11%
Other
(Agriculture,
livestock,
mineral), 1%

Electricity, gas &


others, 10%
Financial
services, 6%

Activities to
support extraction
of minerals, 1%

Source: Brazilian Central Bank

Other services,
12%
Oil and gas, 5%
Mining of metal
ores, 5%

Brazil to the Automotive World

Telecom, 19%

Investments in Brazil
Strong FDI from diversified inflows
FDI per country (USD million)

Issue/trend

Netherlands
United States
Spain
Japan
France
United Kingdom
Hong Kong
Canada
Luxemburg
Austria
Others
Total

2009
6 515
4 902
3 424
1 673
2 141
1 032
34
1 372
537
48

2010*
6 702
6 144
1 524
2 502
3 479
1 030
83
751
8 819
3 420

Jan-Nov/2011*
16 576
7 784
7 742
7 444
2 680
2 625
2 075
1 565
1 548
1 462

10 001
31 679

18 129
52 583

10 748
62 249

* Preliminary data

Brazil to the Automotive World

FDI inflows to Brazil have been


diversified and aimed at
increasing the countrys
productive capacity. The
Netherlands (26.6%), United
States (12.5%) and Spain
(12.4%) are at the forefront as
the main investors in 2011.

Source: Brazilian Central Bank

Investments in Brazil
2012 FDI Confidence Index the turn of the emerging markets
Brazil,

which passed the United


States into 3rd, exemplifies the
Issue/trend
shift to emerging markets. Its rise
from fourth comes on the back of a
surge of foreign investments, which
rose 87 percent to USD 48 billion in
2010.

The

country, which attracts more


than half of FDI in Latin America,
experienced particularly strong
growth in inward investment in the
renewable energy, electronics,
chemicals, and food and beverage
sectors.

Low
confidence

(calculated from 1 to 3)

High
confidence

Source: A.T. Kearney FDI Confidence Index 2012

Brazil to the Automotive World

Brazilian
Automotive
Market

Brazilian Automotive Market

Anfavea 2010 Forecasts

5.7
5.3

4.7
4.3

4
3.4

3.1

2.7
2.9

2.9

3.9

3,6

3.2

4.3

4.4

4.5

4.0
3.4

3.6

1
0
2008

2009

2010

2011F

Sales

Source: Anfavea OEM Brazil association

Brazil to the Automotive World

2012F

2013F

Production

2014F

2015F

2016F

Light vehicles sales in Brazil


is expected to increase from
3.4 million units in 2011 to
5.7 million units by 2016.
This is in spite of massive tax
burden and high consumer
interest rates, which
increase effective prices
substantially and thus keeps
industry volumes below total
market potential.
Total Fleet: nearly 37 million
vehicles light vehicles and 3
million heavy commercial
vehicles plus over 11 million
motorcycles significant
aftermarket.

Market Competiveness
Passenger Cars Market share in Brazil
Market- share as of -1998

Market- share as of - 2010

Renault 1%
Others 9%
Others
20%

Fiat
24%

VW 29%
Ford 13%

RenautNissan
6%

Ford
10%

VW
21%

GM 22%
Fiat 25%

GM
19%

The top 4 OEMs (Fiat, VW, GM e Ford), represented 74% of the total market in 2010.
In 1998, the same companies had 90,2% of the market.
Source: Anfavea OEM Brazil association

Brazil to the Automotive World

Brazilian Automotive Market


Top light vehicle
manufacturers:
Volkswagen
Group
Fiat Group
General Motors
Ford Motor
Renault
PSA Group

2010 Brazilian LV production share

PSA
4.7%
Other
8.9%

Renault
5.4%

VW
26.1%

Ford
10.6%

GM
19.7%

Source: Anfavea OEM Brazil association

Brazil to the Automotive World

Fiat
24.6%

Brazilian Automotive Market


Light vehicles sales in million units (20102018f)
Growth slowed in 2011, however, the
long-term growth story intact

120

100

Axis Title

80

60

Global light vehicle (LV)


sales register modest
growth in 2011 with the
emerging markets
cooling down, however,
the long-term growth
story in emerging
markets remains intact
Geography

40

2011
growth

2012
growth (f)

CAGR
2010
2015(f)

Global

4.1%

5.0%

6.5%

Brazil

2.5%

1.1%

8.9%

India

5.2%

12.0%

14.4%

China

4.6%

9.2%

9.9%

Russia

38.2%

2.6%

12.7%

20

Global total

Brazil
2010

2011 (f)

Source: JD Power

Brazil to the Automotive World

India
2012 (f)

2013 (f)

China
2014 (f)

2015 (f)

2018(f)

Russia

Automotive Market Investments


Investments announced
Investments in the sector are forecasted in US$ 15 billion, between 2009 and 2012.
Issue/trend
Companies that are already
in the brazilian market represent 80% of this number;
New comers have plans to build plants in Brazil, such as Hyundai and Chery;
Companies established in the country are planning to expand its current operations Volkswagen is
planning to increase its production capacity to 1 million vehicles by 2012,
and GM is planning US$ 1 billion investment in its Gravata Plant, not to mention new GM and Fiat
investments in the Northeast (Pernambuco) and several other projects currently under negotiation with
multiple states;
PSA Peugeot Citroen, Honda and Toyota also announced major investments in the country
in upcoming years;
Brazil has an strong established base for product development and engineering;

Brazil to the Automotive World

Automotive Market Challenges


Automotive Industry Scenario

Rising costs of raw


materials (steel) X
importation

Quality problems that


come from Tier 2 and
3 plus suppliers
bottlenecks

Tax Burden
versus Government
Incentives (federal,
state and local)

Brazil to the Automotive World

Increased local
and global
competition
New players

Increase in
imports of vehicles,
IPI Tax
versus
Automotive Regime

Significant
investments for
expansion

Difficulties in
obtaining skilled
labor (Engineering)

New regulations
(air bags)

Increased consumer
demanding technological
demands x
Decreasing
prices
Development of
alternative energy
sources
PCH captive power
plants

Low investment in
Growth of sectors
local R&D
linked to the
versus Technology
production of trucks,
Innovation incentives
tractors and
and
machinery
Automotive Regime

Tax Environment Overview

Not an OECD member


Taxes imposed at the federal, state and municipal levels
Complex indirect tax system: multiple federal state and local taxes apply to the same
transactions, tax-on-tax with massive impacts on pricing, cash flows, and profitability
Guerra fiscal (harmful tax competition) between states (27) and municipalities
(over 5.000) to attract investments
Lack of harmonization creates significant tax inefficiencies
Tax incentives available to attract or retain investments, and/or to protect local
industry
Taxation of income on a worldwide basis with severe look-through mechanism and with
foreign tax credits available (general limitation) at the end of each calendar year
No corporate income tax consolidation mechanism available in Brazil
Brazilian tax system complexity and frequent changes requires constant monitoring of
both amendment in tax law and new interpretation
It is not rare that the tax authorities take unreasonable positions and that taxpayers
may need to litigate/or discuss administratively
Administrative jurisprudence trend of adopting a substance over form approach

Tax Environment Overview: main corporate taxes


Corporate Income Tax (IRPJ) and Social Contribution Tax on Profits (CSLL)
Combined corporate income taxes rate - 34%
Net operating losses (NOLs) may be carried forward indefinitely for corporate tax purposes, offsetting is limited
to max 30% of annual net taxable income (no carryback)
Significant Relief Mechanisms: Regional Deferral Incentive (North and Northeast), Interest on Equity, Export
Financing, Technology Innovation incentives, etc.

Gross Revenue Contributions (PIS and COFINS)


Applicable under a non-cumulative VAT-like regime (default) or under a cumulative regime. General rule: combined
rate under non-cumulative regime is 9.25% with credits available on certain inputs to offset against PIS and COFINS
due (under the general cumulative regime, the combined rate is of 3.65% with no credits available).
On the gross consideration for sale of goods/taxable services

Excise tax (IPI) Federal VAT


generally levied on import or manufacturing of goods, rates vary according to the tariff code (0-365%)

State VAT (ICMS)


generally levied on the physical movement of goods, including their imports. It also applies to certain services (e.g.
telecommunication services and transport). Interstate transactions rates: 7% for North, North-east or Middle-west
regions or Esprito Santo or 12% for South or South-east regions Intrastate or import transactions rates: 17% or 18%
depending on the State.

Other: Service Tax (ISS) Municipal tax levied on the rendering of services. Rates vary from 2% to 5% depending on the
municipality; Customs duties (II) Incurred on importation of tangible goods into Brazil; Tax on Financial transaction
(IOF) Applicable to most financial transactions such as, currency exchange, credit, insurance and securities. Rates vary
according to the transaction. Most common rate is 0.38%.

The Brazilian government actions


Automotive Regime: Temporary Incentives/Protection or Tax Truce?

Prior regimes (i.e., 1995-1999) provided significant reductions of customs duties and other
taxes, and the main object of policy was twofold, the protection of manufacturing employment
(also targeting certain areas of the country) and enhancements in the balance of trade
(reduction of imports and increase of exports) with a 60% local content requirement.

The Current regime operates under a slightly different logic. The IPI tax was increased,
effectively from 25% to 55% affecting imports of all vehicles, and its reduction is conditioned to
local development projects with creation of engineering and technology activities and jobs in
the country. Now the Automotive Regime is intrinsically linked with Brazils new policy on
Technology Innovation and Development. Trade agreements (i.e., Mexico) subject to QUOTAS.

Local production of certain products with a 65% local content requirement is necessary to
enable the importation of assembled vehicles.

The automotive regime effectively forces companies that did not historically have full
manufacturing in-country and that were successful in the recent years importing finished
vehicles (JAC, Chery, BMW and Land Rover to name a few) to implement local plants in the
coming years, or to face a substantial competitive disadvantage to sell into the local market.

Brazil to the Automotive World

The Brazilian government actions

The plan's objective is to stimulate the industry, which must accompany the growth of domestic
demand and the level of consumer demand in Brazil. To this end, measures were announced
in eight areas: foreign exchange, taxation, credit, stimulating the production with an increase
in government procurement, export promotion, trade defense actions in the sector
of communication and information and new automotive regime.

PAYROLL tax reduction

There will be exemption of 20% contribution to the National Social Security Institute (INSS) on
the payroll. In exchange, the companies collect a new tax of 1% to 2.5% of revenue domestic
sales for manufacturers of automotive components, will be 1%.

Brazil to the Automotive World

The Brazilian government actions


CREDIT

For large companies, the acquisition of trucks and buses can now be done with a rate of 7.7%
per annum and a term of 120 months (previously 10% per year and 96 months), with funding
of up to 90% of well (it was 70%). For Procaminhoneiro line toward autonomous, micro,
small and medium enterprises, the interest rate is now 5.5% pa (was 7% per year), also with
120 months to pay and fund 100% of the well (it was 80% .) Was kept at special rate of 5%
per annum for the purchase of hybrid buses.

IPI Tax

To qualify for the scheme, companies first need to meet at least three of four requirements
to receive government incentives, ranging from the elimination of 30 additional points to the IPI
extra discount of 2 points in the normal rate.

The first requirement is to invest at least 0.15% of gross revenue obtained in the country
in research, technological development and innovation. This percentage rises to 0.5% from 2017.

The second condition is to invest a further 0.5% of gross sales in engineering and basic industrial
technology - a percentage that rises to 1% from 2017.

Brazil to the Automotive World

The Brazilian government actions

The third measure is to obtain the qualification meet in Brazil at least 8 of 12 stages of
production of light vehicles and 10 of a total of 14 cases in the case of heavy vehicles. By 2017
this figure rises to 10 of 12 steps in the production of light and 12 of the 14 heavy.

The fourth requirement of the new automotive regime concerns the efficiency of the models
produced in the country from next year, automakers will need to register at least 60% of car
models manufactured in the labeling done by Inmetro. This index will reach 100% in 2017.

Nationalization and incentives

After registration under the new regime, fulfilling three of the four requirements above, IPI will get
discounts at companies that buy in Brazil and Mercosur vehicle parts and supplies, with minimum
rate to be stated in the decree to be published.

The reduction of 30 percentage points (pp) IPI is calculated based on the value of purchases
of parts and materials in the country The larger the purchase, the greater the discount, up
to 30 percentage points. There will be additional reduction of up to 2 percentage points in the IPI
for companies that meet the goals of investment in R & D (0.15% of gross sales) and engineering
(0.5% of revenues).

Brazil to the Automotive World

E&Y and
the Industry

E&Y Global Automotive Center

Ernst & Youngs Global Automotive Center


Our

Global Automotive Center is focused on


the key business issues
in the global
Issue/trend
automotive industry.

It

brings together 7,000 professionals around


the globe to help our clients achieve their
potential a team with deep technical
experience in providing assurance, tax,
transaction and advisory services.

The

Global Automotive Center works to


anticipate market trends, identify the
implications and develop points of view on
relevant industry issues. Ultimately, the
Center assists in helping clients meet their
goals and compete more effectively.

Brazil to the Automotive World

Most automotive companies are looking to solve two


key challenges - improving business performance
and cost reduction. This dual objective can deliver
significant benefits and position the organization to
emerge from the downturn with a stronger, more
secure and competitive profile.
Whether the focus is on transforming the business
or on sustaining performance and building on
achievements, we help our clients improve the
performance and effectiveness of their business
by examining everything from supply chain
management and business processes, to
future directions and opportunities for growth.

Presented by: romero.tavares@br.ey.com

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