Feb. 9, 2009 – A developing market

By Steve Bauer
Contributing writer
Even in this modern age of a global economy, the large-displacement motorcycle industry is limited mainly to the North American and European markets. An alternative to those two markets is surfacing, however, as more powersports companies are looking toward South America as a legitimate large-displacement growth market and profit center.
One country in particular, Brazil, has steady overall economic growth, a young population and a booming middle class, all factors that are catching the attention of not only OEMs, but aftermarket companies as well.
“There’s no doubt that our Latin American markets are growing, with Brazil being the biggest and growing the fastest,” Jim Ziemer, CEO of Harley-Davidson, said at the company’s 105th anniversary last summer. “We’re growing at a rate of about 80 percent this year and they’re going to continue to grow. There are a lot of opportunities.”
Michael Lock, CEO of Ducati North America, said, “we take that market very seriously as a volume potential for the future and believe it is one of the best untapped ones in the world in terms of volume during the next 3-5 years.”

Brazil
Since 2002, South America, and Brazil in particular, has enjoyed a period of steady economic growth. Consumer incomes have risen across the board, and have been accompanied by stronger growth with low inflation, which has boosted the average household’s “real” wages. The result has been a sharp increase in both consumption and retail demand, creating market conditions that powersports companies are eager to tap into.
Although Brazil’s middle class population (86 million) is small percentage-wise compared to other South American countries, such as Chile or Argentina, the country’s large size and young population (mean age is 29.4) make it one of the most attractive new consumer markets in the world.
In fact, the Brazilian government has given this group of consumers an official name: Class C. This segment of the country’s population earns an average of $500 U.S. a month, and most important to businesses, has grown by about 20 million in the past two years alone. As the size and average income of Class C continues to expand, analysts say retailers can expect a sustained boom in the new mass consumer market for 5-10 years.
Lock of Ducati North America says his company isn’t conducting much business in South America at the moment, but insists it’s a market Ducati is looking to invest in long-term.
“(China and India ) are slow-burn, long-term markets, whereas a market like Brazil has a fairly sophisticated infrastructure and enough pockets of Western-level disposal income already,” he said. “We just need to figure out the business approach to it. I don’t think we’re worried about the demand.”

Tariff troubles
One of the largest sticking points for many companies attempting to enter the Brazilian market is the high import tax and tariffs imposed on importers, forcing many companies to use a Brazil-based distributor or purchase land in the country and build production facilities. Analysts estimate Brazil’s tariffs and other taxes account for nearly 15-17 percent of the country’s GDP. In many cases, durable goods are taxed at double or triple the cost of what an importer would likely sell the item for.
The costly investment foreign companies are forced to make have scared many away, afraid they would not be able to sell enough volume to compensate for the income lost due to import costs. Still, several powersports companies have decided the potential profit is worth the risk. Besides Harley-Davidson, Honda, Suzuki and several other manufacturers have already invested in either production facilities or distribution agreements with Brazilian manufacturers.
Lock says Ducati signed a distribution agreement with a Brazilian distributor during the past 12 months, and believes the key to getting volume in the Brazilian market is to assemble the bikes there.
“That really is the only way you could seriously consider developing that market,” he said. “The import tax and the tariff situation limit the importation of bikes. So we are investigating a knockdown arrangement for the Brazilian market with local assembly in Brazil. The market is big enough to warrant us looking at this, and will be a project for the future.”
Roy Oliemuller, spokesman for BMW, says his company decided five years ago to purchase several large plots of land in both Brazil and Argentina, with the intent to build production facilities there.
“We have several facilities in place now where we are producing both automobiles and motorcycles, and we are pleased with the sales results we are seeing in the South American market,” he said.
Oliemuller continued that several steps have been taken by U.S. and overseas manufacturers to work with several South American governments to ease tariffs and other costs associated with importing product into the region.
“There has been some significant progress made there, particularly with the new Brazilian president,” he said. “They understand that any future growth they have will depend greatly on foreign investments, and we’ve seen some signs that they would be willing to lower their tariffs in exchange for partnerships with local manufacturing companies, etc.”

Brazil’s credit crisis
Like most countries around the world, Brazil also has been unable to avoid the recent economic downturn. One particularly troubling economic trend is the large amounts of goods purchased by Brazilian consumers on credit, which is nearly 200 times higher than any other South American country.
“Brazil is a country hooked on credit,” said Larry Dalton, an independent economist based in Miami, who specializes in international affairs. “Anything at all can be financed, from shoes and purses to groceries and even prescription medicine.”
Dalton believes Brazil is one of the most vulnerable markets in South America because of the wide availability of credit. He says although the country’s economy can likely continue growing next year at a reduced pace, the emerging middle class will be faced with a credit crisis of its own.
“It has to be a concern to businesses looking to invest over there because here you have a large group of consumers who are basically living on credit, and credit has disappeared,” he said. “The only saving grace compared to the U.S. market is that incomes will continue to rise in the country, and consumers should be able to continue spending because the credit situation there is on a much smaller scale.”
Still, Dalton says the personal debt of Class C households has increased tenfold in the past decade, and these households are now the leading source of borrowing in Brazil, replacing industry. Brazilians average three credit cards per adult, with the number of credit cards growing from 199 million in 2000 to 484 million in 2008.
“This increased consumption in Brazil is sailing on a sea of easy credit, part of the worldwide proliferation of financial assets,” said economist Norman Gall, executive director of the Fernand Braudel Institute of World Economics, in a recent essay on the roots of the global financial crisis and its effect on Brazil.
In addition to buying millions of fridges, TVs and other appliances, they have driven growth in the auto and motorcycle industry. Brazil has doubled its motor vehicle production since 2000, and sold more cars in the first half of 2008 than in all of 2003. Its motorcycle production has increased by more than 20 percent, with 2007 sales numbers reaching record highs for the country.
Dalton says the problem is these goods were all purchased on debt, and continued overseas investment is vital to the country’s health.
“The stock market there has plummeted more than 60 percent since last spring,” he said. “The currency has plunged, and the central bank has had to intervene with more than $50 billion (U.S.) last month to keep it healthy. At the same time, however, it has also stopped raising its key interest rate to fend off inflation.”
For the past few decades, South America’s overall failure to address its poor infrastructure has been a drag on economic growth, and steps are now being taken to correct that. Brazil, for example, plans to spend $280 billion (U.S.) through 2010 for nationwide infrastructure projects. This amount equals a whopping 22 percent of Brazil’s GDP.
“Areas like infrastructure and pension systems are really what will be the key for both Brazil and other countries in South America to continue their rapid growth,” said Jennifer Bergen, a trade analyst for the Los Angeles, Calif., based investment firm Stroud-Martin.
“Investments in those sectors are expected to lead to higher growth and attract more foreign direct investment.”

Better prepared to survive
In past decades an economic crisis similar to the one currently under way would have been devastating to most, if not all, South American countries. Long-term investments in infrastructure and national manufacturing growth have placed South America in a much better position to resist the economic storm.
“The region is much less vulnerable than it was some years ago because it has drastically reduced its dependence on exports to the U.S,” said Bergen.
Nevertheless, Bergen does admit the sharp slowdown in the U.S. economy will negatively affect South America, particularly smaller countries such Columbia, Peru and Venezuela that rely on trading commodities such as oil or cocoa beans for economic stability.
“Those countries are going to suffer, no question about it,” Bergen said. “But while a negative impact is expected, it should be much less severe as it would have been a few years back.”
Bergen continued that more prudent fiscal policies in combination with the introduction of inflation targeting several Latin American countries have not only driven inflation down, but also helped to enhance investor sentiment. “Those factors will continue to ensure that South America is an essential destination for global companies keen to grab a slice of the rapidly emerging domestic market,” she said.
That’s a belief that many powersports manufacturers and aftermarket companies echo.
“In our view, the current economic momentum is likely to result in a prolonged period of sustained growth,” said Richard Kimes, director of marketing for national distributor Helmet House, “and we plan to be there to reap the benefits.”