Quality and Equipment

83 Constant investment in technological development is a feature of ’s machinery and heavy equipment industry. Its ability to compete and total revenues in recent years were highly beneficial to the nation’s economic development. The industry’s exports in 2004 surpassed all previous records. In 2005, however, demand for machinery began to fall off. The article points up some of the reasons for the primary pinch points restricting the growth of Brazil’s machinery industry.

razil’s machinery and heavy equipment industry stands in 10th place on the global ranking, and is the nation’s fourth- Blargest in terms of exports. It currently comprises 4,500 predominantly small and medium-size companies (90%), operating in the state of (69%) followed by (11%), (6%), (5%), Paraná (4%) and (3%)—with another 2% distributed among the remaining states. The industry’s capitalization is 80% domestic and 20% foreign. A distinguishing feature of the industry is its constant investment in and technological development. Another important characteristic is the size of its workforce—over 210,000 jobs—and the job security enjoyed by workers in that industry, comprised as it is by highly specialized personnel.

85 The industry has managed to constantly increase its billing revenues, even while weathering some turbulence in the Brazilian economy. Its performance in 2004 was the best over the past nine years, since the Real Plan was instituted, and it achieved record exports which resulted in a balance of trade equilibrium.

Positive Performance

Revenues for the industry amounted to R$45.61 billion in 2004, a 30% increase over 2003. This kind of outcome bodes well for the nation’s economic development, according to Newton de Mello, president of the Brazilian Machinery Manufacturers Association (Abimaq), in that it exemplifies the current generalized increase in Brazilian industry’s competitiveness and output capacity, bearing in mind that the sector is highly reproductive of wealth. The total billing revenues garnered by the industry in 2004 were driven by both exports—which aggregated $6.84 billion, up 38.5% over 2003—and the domestic market. Its 20.6% growth in apparent consumption—equal to manufactures plus imports minus exports— reveals a strengthening domestic market. According to economic indicators used by Abimaq, 56.2% of the industry’s total revenues come from the domestic market and 43.8% from export sales. Out of approximately like 20 countries that are global exporters of heavy machinery, not a single one can expect to offer all types of equipment. Brazil has, quite correctly, concentrated on developing those types of capital goods in which it can offer quality at a competitive price. Not only has nationally-produced machinery and equipment supplied a significant fraction of the local market, the industry exports nearly 44% of its output.

86 Santos Port - Heavy machinery exportation.

Trade Balance Equilibrium

Also in 2004, in the wake of two consecutive years characterized by rapid growth in overseas sales, the machinery and equipment industry managed to achieve a trade balance equilibrium, with exports slightly ahead of imports. These exports, an all-time high, aggregated $6.841 billion, a 38.5% increase compared to 2003. Imports stood at $6.836 billion, up 18% over total imports in 2003. While going over the data, Abimaq President Newton de Mello pointed to the efforts on the part of Brazilian manufacturers to increase their competitive advantage and go after the export market in the wake of the 1999 currency devaluation. This greatly increased the stature of the industry in Brazil, where it is the second largest source of exports.

87 Industrial welding

Another contributing factor behind this increase in exports was the dollar exchange rate from 2003 to mid-2004, which put machinery manufactured in Brazil on a more competitive basis in price-sensitive markets. In addition, there was a resurgence of industrial activity in the United States and Europe, and a rapid increase in sales to Latin American countries such as Mexico and , where industrial recovery was a great help. We must also keep before us the issue of technological advancement, with its attendant rapid increase in the quality of mechanical capital goods. These advances were a driver for growth in exports over two consecutive years. A look at our primary export markets will suffice to show the degree of technological development and price competitiveness attained in machinery and equipment produced by the Brazilian industry. The United States is in first place, followed by Argentina, Germany, Mexico and the UK. 88 The segments making the greatest contributions to total exports in 2004 were highway construction machinery ($1.086 billion, 93.25% growth), compressors ($618 million, up 14.04%), farm equipment ($536 million, up 63.74%), pumps ($367 million, up 66.52%) and power transmission machinery ($232 million, up 58.65%).

Downturn Indicator

In 2005, however, machinery sales in Brazil began showing signs of a downturn which, once started, is difficult to reverse. The underlying reasons were high interest rates and very weak dollar exchange rates. Both of these factors reduced the competitiveness of Brazilian capital goods. The downturn first showed up in farm equipment and machinery, in which the economic performance has been declining since last year. For bureaucratic reasons, more than anything else, that segment experienced momentary difficulty in freeing up National Development Bank (BNDES) credit line financing for the Moderfrota agricultural machinery modernization program, causing a two to three-month hold up in operations. This came as a huge blow to the industry precisely during the season when demand for farm equipment is at its highest. Once the bureaucratic problem was straightened out, the harvest season had already come and gone. On the heels of this mishap came a sharp drop in prices on agricultural commodity exchanges abroad. This was linked to a falling dollar exchange rate against the Real. Together, these unfortunate events worsened the pessimistic outlook those businesses have developed in the face of rising cancellations and a falloff in new orders during the second part of 2005. On top of the

89 weakening dollar exchange situation, several states in southern Brazil experienced a drought which affected soybean, cotton and winter corn crops. Overall, entrepreneurs in that industry are beginning to look to the future with grave misgivings. Although economic indicators for the sector are still positive on average, the figures are beginning to show downturns in a number of different segments—downturns which had previously affected only agricultural machinery and equipment.

Slowing Growth

Abimaq therefore made downward adjustments to its billing revenues growth forecasts for the industry in 2005. Forecasted growth, which stood as high as 15% at the beginning of the year, dropped to zero halfway through 2005, and industry businessmen believe the outcomes will be much like those for 2004. There are also indications of a tightening up of export markets. There is a considerable lag before downturns show up in the accounting books, because these ledgers record revenue streams from orders placed months or even years before. The production cycles for heavy equipment are very long. Companies in the industry are giving up hard-won slices of overseas markets because of falling dollar values on Brazilian currency exchanges. Abimaq has also shown that exchange rate instability and sharp fluctuations make planning practically impossible for companies engaged in importing and exporting capital goods.

90 Industry - Heavy mechanic - Piracicaba - SP

91 Primary Bottlenecks

Among the bottlenecks most heavily restricting growth in Brazil’s heavy machinery industry, a most urgent issue is the industry’s plea for easing the burden on productive investment. An important industry demand beyond completely eliminating the excise on manufactures (IPI) is the prompt transfer of ICMS sales tax credits to purchasers of machinery, reimbursement of which currently takes 48 months. This is not a plea for benefits favoring the industry, but rather, an effort to establish an equal footing with the approximately 20 countries producing capital goods and which have unburdened productive investment, making tax credits available to purchasers of capital goods. The purpose is to encourage the purchase of equipment—the tax component of which ranges from 25% to 30%—and generate goods, jobs and employment. This is an effort to increase the levels of productive investment essential to the nation’s sustainable growth. On the relation between ICMS sales tax credits and exports—which in the state of São Paulo alone add up to R$19.3 billion—the industry proposes that these be rediscounted as federal notes receivable. The suggestion is that the federal government create a fund and transform unpaid ICMS credits into securities negotiable on financial markets. The idea is that the State should—rather than pay the credits—offer the company a negotiable instrument which it could then discount with the federal government. One recurring problem seen as crucial to the industry is the sharp increase in prices. A very broad analysis ordered by the Association shows by its conclusions that this particular raw material—accounting for 17.46% of equipment costs—more than doubled in price in 2004.

92 Engrenagens

The industry is represented by the Brazilian Machinery Manufacturers Association (Abimaq), created in 1937, with the founding of the Textile Machinery and Accessories builders’ trade association. With 1400 members currently in its ranks, the organization watches out for industry interests, takes part in political and economic activities, fosters international trade and cooperation and contributes toward improving member company performance in aspects ranging all the way from technology, through human resources training, and into modern business methods.

Newton de Mello President of the Brazilian Machinery Manufacturers Association (Abimaq) www.abimaq.org.br

93