Challenges and opportunities
By Lindsey Anderson25 October 2016
There is no doubt Latin America has had its challenges this year. Political unrest and resulting financial instability have halted Brazil’s once-thriving economy, which directly affected construction, rental and aerial businesses. On top of – and in direct correlation with – Brazil’s tumble, LATAM’s overall GDP is expected to be -0.5 percent for 2016, reflecting a second year of slowdowns. The country’s instability created a ripple for all of LATAM, as many surrounding countries have strong business relations with Brazil.
“The economic slowdown in South America was basically caused by the Brazilian economy recession – that country is the biggest market in the region and seventh [overall] in the world’s economy,” says Gustavo Faria, general manager for Latin America, Terex AWP. “The country continues to face political uncertainties and high unemployment rates as a consequence of a decreasing demand for almost all industrialized products (car manufacturers, consumer goods, food industry, etc.)
“The infrastructure construction sector has stopped dramatically due to the recent corruption scandal, and this has affected the machinery business in general in all regions of the country. On top of that, China’s decreasing demand for commodities – minerals – has also slowed the mining sector, which affects the demand for cranes, aerial lifts and construction equipment.”
Carlos Hernandez, Haulotte Group’s managing director - Latin America, says while Brazil’s economic difficulties weren’t a total surprise, the major shock was how much it directly linked with the construction, rental and aerial industries.
“If we look at the overall region, the Latin America market is facing a slowdown of approximately 12 percent versus last year,” Hernandez says. “The most affected country [is] Brazil with -60 percent.”
Brazil and its neighbors
In 2013, Brazil saw nearly 9,000 machines enter the market. In 2014, that number was nearly cut in half as 5,000 units came to shore. According to Hernandez, in late 2015, the Brazilian market dropped abruptly when President Dilma Rousseff was re-elected. (President Dilma Rousseff has since been suspended from office and will stand trial, accused of manipulating the government budget.)
“This decline continues to negatively impact the Brazilian economy in 2016,” Hernandez says. “Brazil is the biggest market in the region in terms of AWPs, with more than 35,000 units installed in fleets.”
Brazil and Mexico together represent roughly 90 percent of the total aerial market in Latin America, Faria says, with Brazil itself accounting for 80 percent of the total market in South America. Even with upticks in Chile and Argentina (more on those markets later), neither country will have enough demand to cover Brazil’s plight.
“We understand Brazilian rental companies will not be investing in brand-new aerial work platforms, so this year will be more challenging in sales than last year,” Faria says. “The few purchases that are happening are for the machines in existing inventory. We expect the market to start its recovery after the next six months, as we believe Argentina President Mauricio Macri will launch a massive privatization project for the infrastructure construction sector in the country, but, the market will only get to the same level of 2014’s within the next three to four years.”
According to rental company Mills Estruturas e Serviços de Engenharia, only 425 aerial work platforms entered the Brazilian market in 2015, representing a 90 percent reduction year-on-year. ALH reached out to Mills but did not hear back for comment.
Rental company Fimatec, based in Rio de Janeiro, agrees it is a very difficult time for business in Brazil. “The economic slowdown is the worst in three decades,” says Hélio Yomura Jr., sales manager at Fimatec. “The lack of investment, high inflation and increasing unemployment rate is a fatal combination that affects our business.”
Fimatec recently partnered with Skyjack to distribute Skyjack products in Brazil. The companies partnered because of the hopeful uptick in international investments in infrastructure, according to industry reports. That said, Fimatec’s regions of Rio de Janeiro and Espirito Santo felt the crunch of the slowdown.
“In my area, there are no regions doing well,” says Yomura Jr. “The Brazilian government has chosen the model to keep the economy growing by incentivizing the internal consumption of general goods. When the unemployment rate went up, the economy collapsed. However, the new government, if confirmed, has the right tools to get us back on the track of economic growth.”
Based in Chile, Trek Rental, says it is squeezing all costs in order to stay afloat.
“The truth is that everyone has been affected,” says Jean Vogt with Trek. “We haven’t been an exception, nevertheless we continue to invest heavily in fleet renewal.”
Trek invested more than US$4 million in fleet in 2015, according to the company.
“I believe one of the few products that hasn’t showed up [in fleets] is lifting equipment, so there is a good horizon for the equipment in the next year,” Vogt says. “Health and safety standards are increasing and this impacts the rental equipment in order to meet higher standards.”
Potential areas of growth vary according to each region. For example, in Peru and Chile, the mining industry is one of the main pillars of these countries’ economies, says Diana Serna-Serrano, JLG’s marketing communications manager - Latin America.
“The construction and infrastructure sectors in Chile, Peru and Colombia will be growing steadily as these countries build and expand airports and highways,” says Serna-Serrano.
Another area of growth is energy. The most attractive countries for energy are Mexico, Brazil, Chile, Panama, Nicaragua and Peru. JLG says the industrial sector is also becoming an opportunity in many markets and agricultural is showing long-term growth potential. With these sectors comes the opportunity for rental. But, just as each market is different within the Latin America region, so is the current status of aerial rentals.
“In the southern cone of South America, Chile and Bolvia’s rental rates are up while Argentina, Paraguay and Uruguay are experiencing low rental rates,” Serna-Serrano says. “In Mexico, some regions are experiencing low rental rates such as in the south, while toward the north excluding Las Bajas, they remain the same. Throughout the market of Brazil, rental rates are down as they are in many markets within Central America and the Caribbean.”
Faria with Terex AWP agrees about regional growth – and differences.
“Chile managed to remain economically stable,” Faira says. “However, after years of steady growth, Chile suffered a market slowdown of its economy in 2015 due to falling international copper prices, since it’s the world’s leading exporter of copper. Due to falling demand in key developing markets, growth expectations are moderate in 2016 and more promising for 2017-2020.”
One company investing in these opportunities is Ahern Rentals, which is opening Ahern Chile, a direct sales and service entity based in Santiago to support the Latin American market.
“This entity and local team will help to build trust with the customer base, and will provide an opportunity to play a role in educating the market on the many different and useful applications of high-reach equipment,” says Matthew Elvin, CEO, Snorkel. “Latin America as a whole is complex with many individual market differences. In terms of equipment rental, we expect Chile to be trending upward, and is set for future growth. The Argentines are [also] optimistic about 2017 and beyond due to lifted import restrictions and the need for equipment in the energy sectors. Brazil will need time to stabilize before there is any significant change.”
Another company with its sights on Brazil is Manitou. While the French OEM has sold products in Brazil since 2008, it just opened a new factory in Sao Paulo; the first production line outside of Europe or the U.S.
Manitou says the strategy of building a factory in Brazil was a process that lasted more than six years. Since the beginning of planning, the project has generated more than 300 direct and indirect jobs.
“We want to have a sustainable presence in Brazil,” says Michel Denis, president and CEO of Manitou. “This current market encounters difficulties, but we are really confident for the future. It will take time, but our group will be present when we will have favorable economic situation.”
The choice of Vinhedo as the site for the factory took into account the ease of access to the airports of Viracopos, in Campinas (SP), and Guarulhos and the Port of Santos, the main entrances of imports and exports in the country.
"Brazil is a very important country for Manitou group, as we see great growth potential here,” says Marcelo Bracco, general manager of Manitou Group in Brazil. “Additionally, the country has four major markets for Manitou: mining, construction, industry and agriculture, the latter has the greatest expectation for Brazil.”
Another growth potential, according to Faria, is in Argentina where the new President, Mauricio Marci, announced major changes in the economic policy, breaking the macroeconomic expansionary policies that characterized the previous government.
“Marci’s government expects that these changes, combined with improvements in the business environment, can create the necessary conditions to put Argentina in a medium-term economic growth path,” Faria says.
Serna-Serrano with JLG also touts Argentina’s potential. “As a result of the recently elected president, there is optimism in this leadership who is looking to restore the country’s economy and policies that will allow our industry to grow in the coming years, including implementing additional reforms in order to help their foreign trade and direct investment opportunities.”
Adriano Battazza, sales director of Skyjack Latina, also bet on Argentina and says that "even though its economy is still walking very slowly, the AWP business in the country brings a positive outlook.”
Other bright spots include Central America, Mexico and Peru.
“Peru’s economy has strengthened recently and growth is expected to rise further in 2016, primarily boosted by ongoing mining investments,” Faria says. “The country has experienced a less favorable economic outlook in 2015, when growth forecasts were revised down to 2.4 percent. Last year’s slowdown was due primarily to adverse international economic conditions with the drop in commodity prices, the pullback in China and an upswing in the dollar.”
Companies operating in LATAM – whether importing, distributing or renting – all had one region they spoke postively of: Mexico.
According to multiple sources, Mexico has been facing a totally different business scenario than Brazil or other areas of LATAM. The country has demonstrated strong growth driven by different private sectors, such as the automotive industry, which has contributed to local demand. Hernandez with Haulotte says Mexico saw “impressive growth” of 50 percent during Q1 of 2016 compared to the same period last year for the industry.
“In Mexico, the automotive industry shows signs of growth as some car manufacturers are looking at opening manufacturing facilities,” says Serna-Serrano.
Another huge development in Mexico is the construction of the new international airport in Mexico City.
Grupo Aeroportuario de la Ciudad de México (GACM), the group behind the international airport, has invested US $1.3 billion to build the new airport since 2014. The figure represents 14.8 percent of the total price of the project, which is estimated at $9.37 billion according data from GACM.
According to a recent story by the Association of Equipment Manufacturers, “GACM published more than 200 contracts related to the construction of the airport, which contain information on the planning phases, the tenders, contract-awarding and implementation of the works.”
“Of the 200 contracts, the tender to build the terminal building, which will require investment of 11bn pesos, and the tender to build runway No. 3 at a cost of 258mn pesos, are among those highlighted.
GACM has said it will launch more than 40 tenders for the airport this year alone.
The airport will have a footprint of 10,946 acres and will handle up to 120 million passengers a year.
With this, sources say Mexico is also starting to invest in rental, which would go hand-in-hand with the country’s 4 percent increase in the construction sector this year. In Q1 of 2016, Mexican industrial output rose by the most it has in three years (up 1.2 percent) The construction jump was its biggest seasonally adjusted month-on-month increase in 12 years.
A survey by the Association of Equipment Manufacturers (AEM) earlier this year found that construction of highways, bridges, railroads and airports is fueling growth in the equipment rental market in five Latin American countries, including Mexico.
The AEM said it surveyed construction equipment dealers, distributors and equipment rental companies in Argentina, Chile, Mexico, Peru and Venezuela. The results showed that over 70 percent of survey respondents said transportation infrastructure was the most important market segment for equipment rental.
But what about Brazil? Despite these bright spots, are there current opportunities in the country?
Back to basics
To most, there are many challenges about doing business in Latin America, and one of the biggest concerns is the unpredictability of the economies. Currency instability, importation and customs legislations and logistics, banking and investment interest rates, safety regulations and the overall difficulty of working on long-term planning make doing business in Latin America tough.
Although Brazil’s economy continues to struggle due to its political and financial challenges, there is potential growth in the industrial, logistics and maintenance sectors. Long-term, the market is showing opportunity in mining and agricultural, Serna-Serrano says.
Other drivers include self-sufficiency in energy; a strong position within textile, aerospace, pharmaceuticals, automobile, steel and chemical industries.
“A rising middle class which demands housing construction, infrastructure construction and modernization (airports, ports, roads, hotels and others) and manufactured goods like cars, refrigerators, TVs and are driving growth,” says Faria. “Also, Brazil is a large country that still has many areas to be occupied and developed. As the country’s economic and political scenarios stabilize, we will experience solid growth again. Recent history has shown that.”
Brody McFarland, vice president of sales Latin America, Snorkel and Xtreme Manufacturing says potential drivers for growth in the Brazilian market include improvements in safety standards and regulation, investment in infrastructure projects, and the need for more energy, which will drive the construction of energy generation facilities.
“While there are some challenges, such as longer sales cycles and understanding cultural differences, we feel that they can be resolved by consistently building strong relationships with the regional market,” Snorkel’s Elvin says. “The aerial rental market is still maturing in Latin America. As new safety standards are adopted in each region, private companies and local governments will require contractors to use equipment that meets their safety requirements. Additionally, access to financing for equipment purchase can be challenging in some Latin American markets. As demand for equipment increases, rental will provide affordable access to aerial equipment. We expect to greater rental penetration in Latin America in future.”
Indeed, the Latin American rental and aerial market is still very new. Terex AWP says the number of machines sold in one quarter in North America is more than the total existing fleet in Latin America.
“All signs show that the AWP and telehandler market in the next 12 months should remain as it is today,” says Hernandez with Haulotte. “We do not foresee significant changes in this sector, but on the other hand, we hope for the second part of next year, the market changes and we will see a new growth trend and a new positive cycle.”
Part of that cycle could be increased use of equipment that’s still in its infancy in LATAM. The market for telehandlers in Brazil peaked in 2011 when almost 1,000 machines made their way into the country. Some rental companies are defleeting due to the slowdown of infrastructure and housing projects in Brazil, but the telehandler market in the other countries is growing, mainly in Chile, Peru and Argentina. Overall, most companies reported the 2015 market was bigger than 2014, and they expect the same for 2016.
“We continue to see increased adoption [of telehandlers] in the Latin American markets as the versatility of telehandlers is appreciated by a wide range of end-users,” says Serna-Serrano. “Telehandler penetration can vary greatly by country based on economic and political stability. We continue to see demand in non-residential and residential construction, mining, agriculture and general industrial maintenance. Customers continue to benefit from the low cost of ownership and increased productivity of these machines as well as their versatility, particularly during challenging times.”
“Telehandler rental is a growing market, as well,” he says. “Brazil and Argentina are the markets that are most familiar with telehandlers. Chile has mainly used compact telehandlers in underground mines. However, the market is still learning the benefits of a telehandler in construction and industrial applications, and ultimately, it will be demand from these contractors that will drive the investment in telehandlers from the rental companies.
“Additionally, the need for high capacity telehandlers in the areas of mining and oil and gas is growing, which will most likely drive increased demand for higher capacity telehandlers, such as the Xtreme XR4030 and Xtreme XR7038.”
Hernandez echoes the mining and agriculture sentiments, saying telehandlers represent an emerging opportunity not only for rental but also for retail in all regions.
“Telehandler business is totally different from aerial work platforms,” he says. “Telehandlers are oriented mainly to end-users instead of rental, which can be attributed to the high cost of maintenance.”
While Latin America might be seen as a follower of a more mature market such as the United States when it comes to trends and uses, one area that it varies greatly in is the length of ownership for its equipment.
“Each market is different in their needs and thus, trends can vary,” says Serna-Serrano. “Given the current economic conditions that are affecting the Latin American region, we are seeing… customers looking for machines that are simple, easy to use and with low maintenance requirements. JLG designed the RS telehandlers based on feedback from customers throughout emerging markets including those in Latin America who requested a machine that was simple to use with a comfortable cab, a single joystick control and enhanced visibility from the cabin. Customers wanted a machine with straightforward service and low maintenance requirements, making it an attractive addition to any rental fleet.
In addition, we have seen an uptick in maintenance and service as owners are looking at expanding the longevity of their equipment.”
Longevity is important as the average lifespan is higher in Latin America. Companies keep their equipment for longer– more than five years and up to 10 in some instances, and some companies will keep their equipment until it is scrap.
“The market in North America is more diffused, more mature,” says Faria. “Companies, and even people, are more used to this type of equipment and the advantages it can bring in operation – schools, supermarkets, malls, airports, everything.
“In North America, there are applications that we still don’t see it happening here yet, but we are starting to see some cultural changes. With the lower demand for aerials on the construction sector, we have been seeing the rental companies being forced to expand the offering of the equipment to other type of customers, like road maintenance, shopping malls and other commercial business maintenance, industry maintenance, large events assembling, artistic projects and more.”
Faria also notes an interesting aspect of rental and aerial equipment in Brazil; “For the first time in history, we are experiencing a significant exportation of used equipment from Brazil to the international market,” he says. “This has been possible because of two conditions: the local market slowdown has created an excess of equipment in the market and the major players are being forced to de-fleet; and the significant local currency devaluation was favorable for exporting these goods as all exportations are done in U.S. dollars.
“We estimate that by the end of this year the country will have exported over 3,500 used aerial lifts, or around 20 percent of local fleet.”
Haulotte says while Latin America adjusts to aerials, telehandlers and rental, the emerging market has a ton of potential.
“Even though the weight of the market does not represent much nowadays, we believe the region, together with Asia, will keep developing AWP and telehandler penetration and turn it into a normal habit to work at height safely,” Hernandez says. “We are the future!”