Brazil Logistics and Express Outlook 2009 an Analysis of the Brazilian Logistics and Express Industry Reference Code: DMAU0424 Publication Date: February 2010

LOGISTICS AND EXPRESS OUTLOOK SERIES Brazil Logistics and Express Outlook 2009 An analysis of the Brazilian logistics and express industry Reference Code: DMAU0424 Publication Date: February 2010

DATAMONITOR VIEW

Catalyst

Government tax incentives, ongoing infrastructural development and rising industrial demand are all helping to drive growth in the logistics industry of Brazil. In particular, the market for contract logistics is forecast to grow by an average rate of 8% over the next five years.

Summary

Datamonitor’s Brazil Logistics and Express Outlook 2009 provides a comprehensive insight into the market structure and growth potential of the Brazilian logistics market. The report includes the following:

• Logistics market overview covering market size and the modal splits for each industry segment.

• Detailed overview of infrastructural developments in Brazil.

• Structural and policy reforms shaping the Brazilian logistics market.

• Drivers and challenges in each industry vertical such as automotive, pharmaceutical, retail and electronics.

• Competitive scenario and key players in the industry.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

TABLE OF CONTENTS

DATAMONITOR VIEW 1

Catalyst 1 Summary 1 EXECUTIVE SUMMARY 6 CHAPTER 1 BRAZILIAN LOGISTICS INDUSTRY: OVERVIEW 8

1.1 Brazilian logistics industry: witnessing accelerated growth 8 1.2 Robust growth in Brazilian economy boosts logistics demand 9 CHAPTER 2 MARKET PERFORMANCE: MARKET SIZE AND MODAL SPLITS 14

2.1 Brazilian road freight market: poised to grow by 4.3% over the next five years, aided by the PAC program14

2.2 Brazilian rail freight market: private players’ expansion of rail corridors to increase rail traffic volume by a CAGR of 4.6% 19 2.3 Brazilian sea freight market: modernization of ports and “Brazilian export strategy” accelerates growth 24

2.4 Brazilian air freight market: set to take off with expansion and modernization of airports and development of logistics complexes 27

2.5 Brazilian warehousing market: expected to witness growth, spurred by global investments and increasing 3PL outsourcing 31

2.6 Brazilian contract logistics market: increasing importance of third-party logistics in demand industries to drive growth 34 2.7 Brazilian freight forwarding market: imperative for exporters to increase third party outsourcing 36

2.8 Brazilian CEP market: witnessing high growth supported by huge network expansion strategies by global operators 37 CHAPTer 3 KEY INDUSTRY SECTORS 39

3.1 Brazilian automotive logistics: boosted by growing automobile sales, aided by government tax breaks 39

3.2 Brazilian pharmaceutical logistics: increased PPP for local manufacturing and new safety regulations attracts 3PL 42

3.3 Brazilian retail logistics: rising e-commerce and fierce competition in the retail sector creates the need for contract logistics 44

3.4 Brazilian hi-tech logistics: Growing investments at 40% in the past year and penetration of foreign players propels demand for value addition 46 CHAPTER 4 KEY THEMES IN THE BRAZILIAN LOGISTICS INDUSTRY 48

4.1 Multiple tax structure remains a burden for companies, leading to high logistics costs 48 4.2 Customs automation through risk management and radar system aids in speeding up clearance 49 4.3 Conceptualization of logistics platforms, global transparks and existence of EPZs enhancing logistics 50 4.4 Untapped potential in the application of IT for logistics, despite an annual growth of 11% 51

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

CHAPTER 5 COMPETITIVE LANDSCAPE and KEY PLAYER PROFILES 53

5.1 Company profiles 55 CHAPTER 6 APPENDIX 60

Definitions 65 Datamonitor consulting 66 Disclaimer 66

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TABLE OF FIGURES

Figure 1: Brazilian logistics industry segmental split, 2008 and 2013 9

Figure 2: Real GDP and the Brazilian logistics industry, 2005–13 10

Figure 3: Trade growth, 2005–13 11

Figure 4: Total merchandise exports, 2008 12

Figure 5: Road freight value and growth, 2004–13 15

Figure 6: Road freight volume and growth, 2004–13 16

Figure 7: Road freight split by express and non-express, 2008 and 2013 17

Figure 8: Rail freight value and growth, 2004–13 20

Figure 9: Rail freight volume and growth, 2004–13 21

Figure 10: Freight volume split by road and rail, 2008 and 2013 22

Figure 11: Sea freight value and growth, 2004–13 25

Figure 12: Air freight value and growth, 2004–13 28

Figure 13: Air freight volume and growth, 2004–13 29

Figure 14: Air freight value split by express and non-express, 2008 and 2013 30

Figure 15: Warehousing spend growth, 2004–13 33

Figure 16: Warehousing stock growth, 2004–13 34

Figure 17: Total contract logistics value split by category, 2008 and 2013 35

Figure 18: Total contract logistics growth, 2004–13 36

Figure 19: Total CEP value and growth,2004–13 38

Figure 20: Growth in car penetration in Brazil, 2003–12 40

Figure 21: Auto parts production growth, 2004–08 41

Figure 22: Retail industry growth, 2004–08 45

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

TABLE OF TABLES

Table 1: Road network statistics 18

Table 2: Rail network statistics 23

Table 3: Sea port statistics 26

Table 4: Aviation statistics 30

Table 5: America Latina Logistica profile 55

Table 6: Vale profile 56

Table 7: MRS Logistics profile 56

Table 8: Companhia Siderúrgica Nacional profile 57

Table 9: TAM profile 57

Table 10: CEVA Logistics profile 58

Table 11: Variglog profile 58

Table 12: Panalpina profile 59

Table 13: TNT Express profile 59

Table 14: Brazil’s industrial electrical and electronic revenue 60

Table 15: Brazil’s industrial electrical and electronic exports by economic blocs 60

Table 16: Brazil’s industrial electrical and electronic imports by economic blocs 61

Table 17: Automobile exports in Brazil 2002–06 61

Table 18: Automobile imports in Brazil 2002–06 62

Table 19: Rail cargo transported by road in tonnes 63

Table 20: Rail cargo revenue by road in $ 64

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

EXECUTIVE SUMMARY

The logistics industry in Brazil was estimated to be worth $107 billion in 2008, with almost 90% of its value coming from road transportation. As the industry is largely dependent on the domestic sector, the impact of the economic downturn was felt at a later stage, when compared to other countries, such as the US. The industry is expected to witness a robust growth of 5.4% between 2008 and 2013, in tandem with other developing countries such as China (6.2%), India (7%), Russia (5.9%) and South Africa (4.2%). Further to this, Brazil’s economic growth is estimated at 3.2% between 2008 and 2013, driven by underlying growth in domestic consumption, trade, industrial output, foreign direct investment (FDI) inflows and private equity investments. These factors will, in turn, boost the development of logistics in Brazil.

Although developments in each segment are contributing to growth across the industry, rail transportation is expected to grow at an average rate of 4.6% between 2008 and 2013, taking share from the dominant road transportation sector. Also, with the emergence of global companies setting up warehousing facilities in Brazil, warehousing is expected to grow at an average rate of 3% over the next five years. The air freight segment, though affected by the slowdown due to reduced export volumes and the impact of fuel prices, is expected to pick up by 2010. Riding on the demand for time critical delivery of goods, the courier, express and parcels (CEP) market in Brazil is expected to grow at an annual rate of 3.4% over the next five years. Time critical delivery for specific business to business (B2B) sectors, aided by road connectivity between neighboring countries and the emergence of air hubs is aiding growth in the CEP market.

A key driver in the growth of the Brazilian logistics industry is the continued support from the government in preparation for the FIFA World Cup and the Olympics, planned to be held in the country. Under the accelerated growth program (PAC) initiated by the government, planned investments of around $280 billion, geared towards infrastructural improvements in such areas as sanitation, energy, public water resources, and housing are expected to put Brazil on a growth trajectory. Additionally, the existence of export processing zones (EPZs), industrial parks for the automotive, retail and electronics industries and multimodal logistics platforms are all expected to bring the Brazilian logistics sector on par with global standards. These developments would also step up contract logistics and centralized warehousing through the hub and spoke model. In light of ongoing growth, the market is also attracting private equity investments, wherein around 45% of the investments for the Latin American region are concentrated towards Brazil.

Given this continued growth and stream of investments, much of the industry is becoming more dynamic. However, there remain considerable supply chain inefficiencies, leading to higher transportation costs. For instance, the average logistics spend as a proportion of gross domestic product (GDP) stood at around 12.5% in 2008, as compared to developed markets such as the US (8.7%), Japan (5.7%) and the UK (6.9%). Contract logistics is thus becoming imperative for industries such as automotive, pharmaceutical, retail and electronics, in order to reduce costs and build efficient supply chains. Consequently, the industry sees immense potential for contract logistics, with highest expected average annual growth of around 8% over the next five years.

The Brazilian logistics market is becoming highly competitive, with more organized players in specific segments such as CEP, railroad logistics and contract logistics. Furthermore, the market is attracting several multinationals through acquisitions or strategic alliances with local companies, leading to consolidation in specific segments such as CEP. The rising concern from such manufacturing industries as automotive and electronics, along with the pharmaceutical and retail industries, all hoping to reduce the number of intermediaries involved in logistical activities, is paving the way for contract logistics in Brazil. Due to the emergence of multinational companies in Brazil, local companies are expected to face intense competition in all market segments. As a result, the market will see Brazilian companies invest in adopting efficient logistic

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practices, sharing expertise from global companies, expanding their network internationally and focusing on value added services in order to stay ahead of competition.

For the Brazilian market, the future outlook is promising, geared by drivers such as growth in outsourced logistics, industry output, merchandise trade, policy reforms on tax regime and FDI. The logistics industry in Brazil is becoming more attractive for both Brazilian companies and multinational service providers. The industry provides immense opportunities for end to end service providers with vertical-specific expertise, provision of value added services, and international networks, with respect to specific segments such as contract logistics and CEP. These opportunities are thus pushing companies to include Brazil in their strategic expansion plans, which will enable the country to compete with other rapidly emerging markets like India and China.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

CHAPTER 1 BRAZILIAN LOGISTICS INDUSTRY: OVERVIEW

1.1 Brazilian logistics industry: witnessing accelerated growth

The Brazilian logistics industry was valued at $107 billion in 2008, and has been growing by about 10% annually since 2004, although it lags behind India and China, which have been growing by 12% and 12.6%, respectively. As the biggest economy in South America, Brazil is increasingly becoming the hub for investments by global retail, automotive, consumer goods and logistics players. With its growing trade and a range of government incentives, the market is revving up to meet demand.

According to the World Bank's logistics performance index, Brazil holds a rank of 41, with a fairly good record of logistical competence. The country has developed its logistical efficiency in the past five years, with improvements in infrastructure, relaxed trading policies in specific sectors, participation of private parties, decentralization of ports, and trade with emerging and neighboring countries.

The logistics market in Brazil is becoming highly competitive in the trucking, CEP and contract logistics segments. Changing supply chain practices in the country, driven by the presence of global companies in the automotive and retail sectors, are also spurring demand. Due to the urge to reduce transportation costs from automotive and manufacturing companies, third party outsourcing is also increasing in Brazil. Companies are gradually shifting from outsourcing rudimentary services such as transportation or warehousing to more value added services.

However, rising transport costs have long been a problem for logistics players, due to infrastructural bottlenecks. The geographical constraints of the Amazon rainforest in the northern part of the country add to the problem, due to lack of adequate mobility. However, investments from government and global players, following the decision to have Brazil hosting the FIFA World Cup and the Olympics, are benefitting the country.

The fast growing economy, increases in private participation, introduction of the accelerated growth program or the Programa de Aceleração do Crescimento (PAC), and ongoing globalization, are the main factors driving the growth of the logistics industry. The PAC is a growth program with a planned investment of $280 billion geared towards infrastructural improvements such as sanitation, energy, public water resources, transportation, logistics, energy and housing across Brazil. Additionally, factors such as an increase in the entry and expansion of international logistics players, outsourcing of logistics functions, and the emergence of lean supply chains in the manufacturing and retail sectors are further driving growth.

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Figure 1: Brazilian logistics industry segmental split, 2008 and 2013

Logistics Value in 2008 - $107 billion Logistics Value in 2013 - $139 billion

WH & Sea & IW WH & 0.8% Others Sea & IW Air Others 5.5% 0.7% 5.5% Rail1.0% Air 2.9% Rail 0.9% 3.0%

Road Road 89.9% 89.8%

IW represents Inland waterways, WH represents warehousing

Source: Datamonitor D A T A M O N I T O R

The Brazilian logistics industry posted impressive development in 2008, in spite of the slowdown in the global economy in the last quarter, although certain segments did show some deceleration in growth; the road freight, rail freight, and contract logistics markets saw robust growth rates of 13%, 17.5% and 12%, respectively, while segments such as air freight and sea freight saw negative growth due to a slowdown in export commodities. Warehousing and the CEP markets saw moderate growth rates of 4.5% and 6.6% in the same year.

The logistics industry is forecast to grow at an average annual rate of 5.3% over 2008–13, driven by growth in trade, although it is imperative for Brazil to reduce its transport costs significantly.

1.2 Robust growth in Brazilian economy boosts logistics demand

Growth in the Brazilian logistics industry is bolstered by the country’s economy which grew by around 5% over the period 2005–08. Economic development is furthered by domestic demand, growth in the manufacturing sector and demand from foreign countries. The strong swell in domestic demand was driven by increased household consumption, due to positive developments in the labor market. Increase in industrial output helped to step up the employment rate in the domestic sector. Brazil’s high reliance on commodity exports to other countries and rising consumerism have collectively contributed to the growth in the logistics sector.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

The Brazilian logistics industry, steered by economic development, witnessed a strong growth of around 10% over the period 2004–08

The Brazilian economy has seen tremendous growth, especially since the industrialization phase. Between 2005 and 2008, the export-oriented economy witnessed robust annual growth of 4.9%. In contrast to other emerging countries such as China and India, which were partially insulated against the global economic crisis, the Brazilian economy was drastically affected in the last quarter of 2008, which has been attributed to its trade dependence on the US. Consequently, a few components of the logistics industry such as air and sea were affected by the slowdown.

Figure 2 below shows that the logistics industry has grown faster than the economy, registering an average annual growth rate of 10% over the period 2004–08. However, alongside the economy, the logistics sector also saw a dip in 2009, due to moderate growth in the civil construction and manufacturing sectors.

Figure 2: Real GDP and the Brazilian logistics industry, 2005–13

Brazil Logistics Value Billion USD Logistics Industry Value growth Real GDP

160.0 13.8%

140.0 11.8%

120.0 9.8%

100.0 7.8%

80.0

5.8% Growth (%) Value $ Billion 60.0

3.8% 40.0

1.8% 20.0

0.0 -0.2% 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Services output accounts for the majority of GDP, followed by the industrial and agricultural sectors. Both the services and industry sectors saw double digit growth rates over the period from 2005–08. This was driven by the wholesale, retail and hotels segments, which contributed about roughly two thirds of services output.

Mining, manufacturing, and utilities accounted for half of the industrial output, growing rapidly, particularly in 2007. The manufacturing sector, which forms more than one third of industrial output, continued to see double digit growth in 2008, thus boosting the demand for logistics.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

The logistics industry has also flourished due to growth in trade, which almost doubled over 2005–08. As a result, the trade- to-GDP ratio is increasing, and it contributed more than half of the GDP in 2008. The country’s total trade is valued at $453 billion, expected to increase to $672 billion by 2015. The anticipated growth in total merchandise and manufacturing exports (including transport equipment, iron ore, soybeans, footwear, and machinery) from the current $174 billion and $89 billion to an expected $261 billion and $151 billion, respectively, in 2013 is also a positive indicator for the development of the logistics industry, as export logistics is a lucrative segment for logistics service providers.

Figure 3: Trade growth, 2005–13

Trade in Absolute Value Trade growth Real GDP growth 800 40%

700 30%

600

20% 500

400 10% Growth (%)

Value in $ Billion 300 0%

200

-10% 100

0 -20% 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Figure 4 shows the total merchandise exports in Brazil, of which the manufacturing and fuel and mining industries constitute the majority. Manufacturing exports, accounting for more than half of Brazil’s merchandise exports, have seen double digit growth since 2004. In addition to manufacturing, exports from fuel and mining are driving the expansion of the logistics sector through maritime and pipelines. The fuel and mining segment has grown at an annual rate of 35% over the period from 2004–08.

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Figure 4: Total merchandise exports, 2008

100% Agriculture US $ 42 billion

Fuel & Mining US $ 80% 43 billion

60%

Manufactruing US $ 89 billion

40%

20%

0% Total Exports $263 billion in 2008 Total Merchandise Exports $174 billion in 2008

Source: Datamonitor D A T A M O N I T O R

Increasing household consumption driven by rise in retail, automotive and hi-tech sectors provides opportunities for logistics players

Brazil is the largest economy in South America, with a GDP of $852 billion in 2008. Although foreign demand also contributes to its growth, domestic demand is its major economic stimulator. Domestic demand in Brazil is driven by a growing urbanized population, which accounts for over 85% of the total population. The favorable conditions of availability of credit to consumers, the rising employment rate driven by industrial productivity, and stabilizing inflation are the main contributors to the country's levels of household consumption.

According to the National Confederation of Industry (CNI), the household consumption growth rate is believed to have reached over 6% in 2008. Developments in the labor market in the past few years and industrial productivity have greatly increased the workforce. CNI recorded that the average rate of unemployment reduced by two percentage points in the year 2008. This is attributed to the large number of jobs created by the manufacturing and civil construction industries.

However, economic development in the northern part of Brazil continues to lag behind the south. For example, nearly 45% of the population is concentrated in the northern part of Brazil, whereas economic growth surrounds the southeast and south regions. This is deterring logistical activities in the area.

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Brazilian industrial policy, deregulated environment and globalization is spurring growth in logistics

Developments in the Brazilian industry are opening up the economy to foreign trade and creating opportunities for logistics players. Global companies have been attracted to Brazil by the increasing deregulation of the market and relaxed government policies intended to liberalize the monopolized nature of specific sectors such as oil, steel manufacturing, power, telecom and transportation. Brazilian industrial bodies are planning public policies for innovation in science and technology and environmental sustainability, in the hope of upgrading Brazil’s ability to compete with international companies. The industrial modernization policy includes the reduction in tax levies on imports for machinery and equipment as well as relaxed policies intended to attract foreign business. Special interest has been laid upon profitable industry sectors such as semiconductors, software, capital goods and pharmaceuticals. Further plans also include improvements in biotechnology, nanotechnology, biomass and renewable energy.

Introduced in 2004, the country’s industrial technological and foreign trade policy (PITCE) established its intention to improve the international competitiveness of Brazilian companies, and is leveraging growth in the industry. The public initiative has also designed programs to support technology-based small and medium sized enterprises.

In addition to creating an amicable trading environment for foreign companies, the government has also taken initiatives to promote domestic production through the import substitution industrialization (ISI) policy which promotes the local production of industrialized products and reduces foreign dependence. These policy initiatives have brought several local private companies into Brazil and are expected to further drive the expansion of the logistics industry.

A spurt in private equity investments amounting to over $600m is aiding industry growth

The growing importance of the Brazilian economy, spurred by the increase in middle class population, industrial output and demand for raw materials from countries such as China, as well as significant trade with its neighbors, is attracting investments from private equity investors. Investors are encouraged by the high potential in the Brazilian logistics sector, which has led to the market attracting 45% of all investments in Latin America. These investors focus toward developing sectors such as railroad logistics, real estate (warehousing) and construction of terminals. Most investments are toward purchase of rolling stock and construction of grain terminals.

For instance, Brazil’s security regulator has approved the private equity fund of Logística Brasil, worth $227m. The principal investors in the fund include pension funds Funcef, Petros and Previ, managed by GP Investimentos. Infrabrasil, another fund, is investing $409m, jointly contributed by the state-owned pension fund Funcef and Inter-American Development Bank (IDB), and is focusing on those sectors with most potential, such as companies engaged in railway, highway, port and water projects. In addition to logistics, global firms such as General Atlantic, TPG Capital and Carlyle Group have made investments in the country for multiple projects across the consumer and industrial sectors.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

CHAPTER 2 MARKET PERFORMANCE: MARKET SIZE AND MODAL SPLITS

The Brazilian logistics industry is witnessing robust growth, driven by large scale infrastructure projects funded by the government, private companies operating in Brazil and international companies. Brazil has been selected as the host nation for the 2014 FIFA World Cup, as well as the 2016 Olympic and Paralympic games, which is driving the Brazilian government to continuously invest in development of logistics capabilities; under the PAC, an investment of $29.6 billion for the development of highways, railroads, waterways, ports and airports has been planned. Although developmental plans around the Amazonian region are undergoing opposition due to deforestation problems, the rigid transport network in the southern part of the country plays a critical role in logistics. The burgeoning growth in trade with the US and European and Asian countries for commodities and high value goods is pushing the government to constantly upgrade its port capacity.

2.1 Brazilian road freight market: poised to grow by 4.3% over the next five years, aided by the PAC program

The largest economy in Latin America has a huge number of unpaved roads, which account for 90% of its road network. Road transport dominates the country's overland transport, carrying 76% of freight volume. Although roads are the dominant means of transport, connectivity is largely concentrated in the southern part of the country, and the road network is highly concentrated towards coastal areas. Most of the transportation in the north-western part of Brazil is obstructed by the Amazon rainforest and a lack of widespread connectivity.

Construction of highways such as the Trans-Amazon highway, Cuiba-Santarem highway and the Trans-Brasiliana highway, facilitate trade with neighboring countries. The Trans-Amazon highway extends about 5,000km and runs from Recife and Cabedelo to the Peruvian border. The Cuiba-Santarem highway is 4,153km in length and runs in a north-south direction. The Trans Brasiliana highway is 3,555km long, and connects Brazil and the Uruguayan frontier.

The trucking market in Brazil is highly fragmented, similar to most other BRIC countries. As the market remains deregulated and devoid of any entry barriers, several small and mid-sized truck players are in operation. Another reason for high fragmentation is the payment of state taxes to pass from state to state, levied on the value of merchandise. The market is highly competitive and has been penetrated by global automotive players in the heavy commercial vehicle segment. The major automotive giants operating in the US have established their presence in Brazil. A large part of the Brazilian trucking market is held by Daimler and MAN AG, accompanied in the heavy commercial vehicle segment by other truck operators such as Volvo, Scania, and Iveco.

Figure 5 below shows that the Brazilian road freight industry was estimated at $96 billion in 2008, registering a growth rate of 12.9% over 2007. The average annual growth rate of the road sector is forecast to be 5.4% over 2008–13, supported by infrastructural developments.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 5: Road freight value and growth, 2004–13

Road Freight Value Road Freight Value Growth 140 14%

120 12%

100 10%

80 8%

60 6% Growth % Value $ Million Value

40 4%

20 2%

0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Figure 6 below shows that the road freight volume grew by 5% in 2008 at 2.2 billion metric tons, and is forecast to grow at an average annual rate of 3.4% over 2008–13.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 6: Road freight volume and growth, 2004–13

Road Freight Volume Road Freight Volume Growth 3,000 6%

2,500 5%

2,000 4%

1,500 3% growth % growth

Volume Million Tonnes 1,000 2%

500 1%

0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 7 below shows the value split between the express and non-express segments of the road freight industry. Brazil is considered a significant investment hub for express companies and the presence of integrators such as TNT, DHL, and FedEx in the country have all been attributed to its strong economic progress. The constant growth in trade is revving up demand and non-express services are expected to take away share from express in 2013.

Figure 7: Road freight split by express and non-express, 2008 and 2013

Road Freight Value in 2008 - $96.1 billion Road Freight Value in 2013 - $125 billion

Non Express Non 98.0% Express Express 98.1% 2.0% Express 1.9%

Source: Datamonitor D A T A M O N I T O R

Government to increase paved roads through seven projects, with an investment of over $6 billion

The Brazilian government is taking steps to improve the regulatory environment for infrastructural investments; flexible regulations are being formulated, intended to attract private sector investments at reasonable rates. The extension of these partnerships has been through grants, administrative concessions, and government efforts to distribute the costs to keep prices low. In the administrative concession, the government incurs the entire cost.

The government has formulated road paving projects in Brazil to reduce high transportation costs. Road maintenance and rehabilitation are the main objectives of these projects. The national department for transport infrastructure (DNIT) has planned to execute these projects specifically in the Amazonian region in the northern part of the country. These projects are partly financed by international lending agencies such as International Bank for Reconstruction and Development

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(IBRD) and the IDB. However, problems concerning deforestation persist in Brazil, which delays economic development projects.

In 2008, Brazil implemented seven 25-year concession projects. These were executed for the development of federal highways in the Mercosul corridor connecting the southern Atlantic coast to Argentina, Paraguay and Uruguay. These seven projects spread across 2,600km and involve an investment of $6.4 billion. In addition to these, another road development initiative was implemented by the State of São Paulo in 2008. This project is a 30-year concession contract to operate and expand the 32km Rodoanel Mario Covas Western Beltway, with an investment of $1.6 billion. In 2008, Brazil started implementing road projects through private-public partnership concession schemes. Following this, toll charges were increased. Consequently, road transportation is becoming increasingly expensive compared to other means such as railways or waterways. In spite of all these developments, the Amazonian region in the northern part of the country continues to be a hurdle for transportation.

Table 1: Road network statistics

Highway network length 1,596,683km Percentage of paved roads 12% Government planned investment on road network $16.7 billion Federal highways 74,073km State highways 2,42,318km Municipal highways 1,280,292km Allocated funds until 2010 under accelerated growth program (PAC) $325 billion Total package for road concessions $3.9m Investment for conservation of 52,000km highways $864m Investment for recovery and maintenance of highways $4 billion Implementation and operation of 206 posts $338m Security system in highways $559m Signaling of 72,000km of highways $238m

Source: Datamonitor D A T A M O N I T O R

The trucking market in Brazil is comprised of a large number of self-employed truck drivers. According to the Brazilian ground transportation agency (ANTT), independent truckers own more than half of the truck fleet in Brazil. The lack of stringent norms regarding truck safety, driving regulations and environmental compliance is leading to high levels of industry fragmentation, which increases customers' bargaining power. With more than 85% of roads being unpaved and relatively low maintenance, the trucking industry is facing the problems of high transportation costs. As a bulk of the cargo carried through road is not of high value, the trucking industry runs on thin margins. Additional tolling costs contribute to these high transportation costs.

However, as a program intended to encourage truckers to upgrade the technology in their trucks and increase productivity, the Brazilian Developmental Bank (BNDES) has made financial aid available to truck drivers from accredited financial institutions, for the acquisition of new or second hand equipment, new tracking systems to be used in trucks, and property and money lending insurance. These new programs are expected to increase organized trucking in Brazil and discourage the operation of older truck fleets, as the average age of trucks in Brazil is around 18 years, which does not meet international standards.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

2.2 Brazilian rail freight market: private players’ expansion of rail corridors to increase rail traffic volume by a CAGR of 4.6%

Unlike the monopolized nature of the rail market in countries such as India, following its privatization in 1998, the Brazilian rail market now constitutes numerous concessionaires who take part in the construction of railways and pay a percentage of revenue to the government. Despite the market penetration of private players, the Brazilian rail sector lags behind in meeting the huge demand for transportation. The rail network is vastly concentrated in the south, southeast, northeast and some central parts of Brazil, largely hindered by the rainforest in the north western part of the country. Additionally, an inclination towards the development of roads reduced public investments in rail after privatization.

The privatization of the Brazilian railways increased opportunities for several private players, thereby significantly improving the rail network. The private rail sector is largely controlled by iron ore, steel and mining companies such as América Latina Logística (ALL), Companhia Vale do Rio Doce (CVRD) and Transnordestina Logistica S.A.

CVRD, also known as Vale, is a mining company that produces and sells iron ore, pellets, nickel, copper concentrates, coal, bauxite, alumina, manganese and ferroalloys throughout and outside Brazil. Its logistics network includes 10,179km of railroads across the country. It manages the railroads of Estrada de Ferro Carajás (EFC), Estrada de Ferro Vitoria a Minas (EFVM), Ferrovia Centro-Atlantica (FCA) and MRS Logistica (MRS).

ALL is the largest private operator in southern Brazil. It operates about 16,000km of rail track, spread across six states and three Mercosur countries.

Transnordestina Logistica S.A, belonging to Companhia Siderurgica Nacional (CSN), operates railroads in seven of the nine north-eastern states of Brazil. It has also begun the operation of the New Trans-Northeastern railway, linking the ports of the Northeast Suape (PE) and Pecém (EC). The company has played a major role in connecting the central-western region with two ports in the northeast, the absence of which led to transportation via the southern ports, which increased logistic costs.

Figure 8 below shows the Brazilian rail freight industry estimated to be worth $3 billion in 2008, registering a growth rate of 17.5% over the previous year. The average annual growth rate of the rail sector is forecast to be 6.6% over 2008–13, driven by factors such as continued development of railroads, improvements in technology for freight operations by private operators and training programs for railway personnel.

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Figure 8: Rail freight value and growth, 2004–13

Rail Freight Value Rail Freight Value Growth 4,500 20%

4,000 18%

16% 3,500

14% 3,000

12% 2,500 10% 2,000 Growth (%)

Value $ Million Value 8%

1,500 6%

1,000 4%

500 2%

0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Figure 9 below shows the rail freight volume growing at an average annual rate of 4.6% over 2008–13, which is higher than the growth in road freight volume.

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Figure 9: Rail freight volume and growth, 2004–13

Rail Freight Volume Rail Freight Volume Growth 700 18%

16% 600

14%

500 12%

400 10%

300 Growth (%)

Volume Million Tonnes 6% 200 4%

100 2%

0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 10 shows the split between road and rail volumes in the overland freight market. The rail network is expected to slightly increase its share, aided by factors such as increased private participation in the construction and extension of rail corridors, and improvements in freight operations.

Figure 10: Freight volume split by road and rail, 2008 and 2013

Total Freight Volume in 2008 - 2.7 billion tonnes Total Freight Volume in 2013 - 3.3 billion tonnes

Rail Rail 18.3% 19.2%

Road Road 81.7% 80.8%

Freight volume includes total road and rail tonnes

Source: Datamonitor D A T A M O N I T O R

National plan for logistics and transportation along with new railroad projects to step up intermodal transport

Despite the penetration of private players, the rail sector faces the twin bottlenecks of less security and low performance speed. An excess of level crossings and the absence of rail contours are reducing productivity and increasing costs in the sector. Also, when compared to more developed countries, the Brazilian rail system lacks an integrated expansion of its rail mesh with the other modes of transport. The Brazilian government also lacks a favorable tax legislation to attract more investments in the sector. Therefore, it has become imperative for Brazil to promote investments through tax incentives.

The rail sector is becoming increasingly important in Brazil, attributed to factors such as fuel efficiency and transport of huge tonnage across long distances. The ministry of transport has developed the national plan for logistics and transportation (PNLT), which plans to implement 11,800km of new rail lines, including 10,700km of large gauge tracks. Network expansions of the north-south, west-east integration railways are underway. Also, PPP (Public private partnership)

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

projects for Nova Transnordestina, Ferronorte's Alto Araguaia to Rondonópolis track, the West Paraná railway corridor and the Ferroanel São Paulo beltway are under evaluation by the ministry of transport. The consolidation of a bi-ocean rail corridor, linking railways from Brazil, Paraguay, Argentina, Bolivia and Chile, is also under consideration.

In order to increase intermodal transport, new railroad structural projects are the North-South Railroad and the new Trans- Northeast Railroad. The North-South Railroad planned through the centre-west of Brazil is to connect the port of Itaqui, in the State of Maranhão in the north of the country, and the port of Belém in Pará State, also in the north, with the port of Santos in the south-east. The new Trans-Northeast railroad is planned to connect the ports of Pecém, in the state of Ceará, and Suape, in the state of Pernambuco, to the port of Eliseu Martins, in the state of Piauí.

The specialized transport rail corridors under study include the “Chicken Railroad” connecting the town of Chapecó to the port of Itajaí in the state of Santa Catarina (Brazil’s biggest chicken meat producer) and the Inter-Ocean Rail Corridor connecting the Pacific to the Atlantic, running from Chile through Mato Grosso do Sul in the Brazilian center-west with the ports of Paranaguá, in Paraná State, and to Santos.

Table 2: Rail network statistics

Rail route length 29,817km Consolidated investment for railways 2008–10 $3.1m Federal railway under concession 28,314km Planned rail length 11,800km Planned large gauge tracks 10,700km Rail meshes under private operation 28,314km Number of level passages along the railways 12,273 Amount of containers carried in 2008 265TEUs Rail length under public investment 211km Rail length under private investment 2,307km

Source: Datamonitor D A T A M O N I T O R

Additionally, there is a huge governmental requirement to heavily invest in rail infrastructure, in preparation for hosting the 20th FIFA World Cup and the 2016 Olympic games. Following this, Korea, Japan and several European countries will be extending their infrastructural presence in developing high speed railroad projects. The Japan bank has also extended a loan to MRS, to modernize and extend its southeastern railroad network. In addition, the São Paulo state government is developing a São Paulo-Rio de Janeiro bullet train with an investment of $9.2 billion, aided by BNDES. PPP is a driving force behind this project, as the state government has transferred the authority of building and operating a 420km rail line under a concession scheme. This project is also planned to increase intermodal transport in Brazil by connecting the railroads with São Paulo's international airport, Guarulhos.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

2.3 Brazilian sea freight market: modernization of ports and “Brazilian export strategy” accelerates growth

The rise in export and import trade in Brazil is the most important inducer of port expansion and modernization; in Brazil, more than 90% of international trade is carried by sea. According to the ministry of development, industry and foreign trade (MDIC), total trade in Brazil increased from $108 billion in 1998 to $400 billion in 2008. MDIC's export strategy is an initiative intended to bring Brazil on par with international markets, and to increase exports from small and medium sized companies. In 2007, the total cargo throughput in Brazil’s ports stood at 755 million tonnes. Out of this, public ports handled 279 million tonnes (36%) and private terminals handled the rest, although trade through public ports is rising faster.

The Brazilian port system is deregulated and has enjoyed reduced government intervention since its privatization. The Brazilian ports can be categorically segregated according to their administration; they are administered by three bodies in Brazil, namely the union, the local state or city authorities and private companies. However, most of the cargo moving out of the public administered terminals is also available for private use. Major players include Vale, Petrobras, Cargill, and Bunge.

Capacity expansion of container terminals, in order to meet the rising demand for trade with other countries, has led in the past to significant growth in the sea freight sector. The economies of scale attained due to growth in volume are reducing container shipping and handling costs. Containerized shipping value grew by an average of 8.6% between 2004 and 2008.

Container throughput in Brazil has been rising exponentially over the past 10 years, following developments regarding the privatization of ports. According to the Association of Brazilian box terminal operators (ABRATEC), the number of container terminals operating in Brazil grew from 3.2 million in 2004 to 4.8 million in 2008. The organization projects an annual growth of 3.3% over the period between 2009 and 2013 for containers in Brazil, led by capacity expansion, faster transit times, expansion of coastal feeder services through the internet and economies of scale.

Figure 11 below shows that the Brazilian sea freight industry (containerized shipping) estimated to be worth $812.6m in 2008. However, the industry was badly hit by the global slowdown, due to reduced trade flows across the world. Future growth is expected to come from schemes to promote exports, port development, PPP projects for infrastructure development and modernization programs. As a result, the average annual growth rate of the sea freight sector is expected to be 4.6% from 2008–13. Port privatization, SEP and port authority expansion plans, as well as presidential decree 6.620 launched in 2008, are driving increase in sea freight value in Brazil.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 11: Sea freight value and growth, 2004–13

Sea Freight Value Sea Freight Value Growth 1.2 30%

25% 1.0 20%

0.8 15%

10% 0.6 5% Growth (%) Value $ Million Value

0.4 0%

-5% 0.2 -10%

0.0 -15% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Developments in logistics and port infrastructure have become imperative for Brazil’s economy growth, as a bulk of its trade is conducted in this sector. Brazil’s sea ports face the challenges of reduced performance as a consequence of the global slowdown, with a few exceptions, such as the port of Santos, which is the largest port in Brazil. Although privatization of ports is increasing efficiency, bottlenecks such as reduced port-to-city connectivity and labor issues are increasing logistics costs. However, the recent launch of presidential decree 6.620, which allows Brazilian and international private companies to build and operate new public ports under concession, is expected to attract investments in port expansion and development. Under this decree, any company is authorized to invest in the new ports, even those not planning to operate the terminals. In addition to this, the new rules for contracting dredging services allow for international participation. Several tenders are under progress for ports in Recife, Rio Grande, Santos and Rio de Janeiro.

Another challenge in the Brazilian sea freight sector is the long and tedious process of port clearance. In order to cater to this, the Brazilian government is planning initiatives to simplify the clearance process through the “paper free port project”.

Among the programs set by the Brazilian government are the National Dredging Program (PND) and the Plan for Improving and Modernizing Port Infrastructure. Under the PND, an investment of $609m is planned for dredging operations in 16 Brazilian ports, while the port modernization program hopes to invest $508m in Brazil. In addition to this, new port and industry complexes are also planned in the states of Pernambuco (Suape port) and Ceará (Pecém port), on the northeast

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coast of Brazil. Plans to develop a refinery and steel plant at the Pecém port and industrial complex at Suape are expected to boost trade in this region.

Table 3: Sea port statistics

Port Coastline (Atlantic coastline) 8,511km Principal sea ports 40 Principle river ports 4 Total volume of cargo handles at handled along the Atlantic coastline 754 million tonnes Total investment in ports 2007–10 $1.3m Total investment in waterways 2007–10 $373m Total investment in merchant 2007–10 $5.3m Inland waterway navigable length 50,000km Inland waterways 11 Total fleet 2,359 Oil tankers 984 Bulk carriers 506 Container ships 210 Other types 417

Source: Datamonitor D A T A M O N I T O R

In an effort to increase intermodal transportation for Brazil, the government’s PAC program is focused on expansion plans across all transport sectors. Under this program, the government has planned investments for the construction, upgrading, division and renovation of 42,000km of highways, 2,518km of railroads and the expansion of 12 ports and 20 airports. An intermodal project announced in 2008 by the Paraná state government includes the construction of the Mercosul port 40km from Paranaguá port. This will act as an additional outlet to the Atlantic for Argentina, Paraguay and Uruguay.

Brazil taps the underutilized potential of inland waterway transportation with an investment of over $900m

Inland waterways in Brazil transport a miniscule amount (less than 1%) of the total freight volume. The waterways spread across a geography of not less than 50,000km and include three major river systems; the Amazon, São Francisco and Parana. Navigation through these inland waterways is not well developed, despite providing high transport potential. Only around 25% of total navigable waterways in Brazil are utilized. However, the Brazilian government is extending its investments, with an allocated amount of $914m (PAC). Under the PAC program’s investment allocation for transport, a number of waterway terminals are planned, to increase navigability. The planned projects include: the Tietê-Paraná and Paraguay-Paraná in the south and south-east; the Amazonas-Solimões, Madeira and Parnaíba in the north; the Tocantins- Araguaia in the center-west; and the São Francisco in the northeast. More investment projects are planned, along with the DNIT and ANTAQ, as waterways are the most economical and environmentally friendly means of transport for the country.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

2.4 Brazilian air freight market: set to take off with expansion and modernization of airports and development of logistics complexes

The air freight segment, which includes air freight, forwarding and the CEP markets, suffered a slowdown in 2008 as a result of the global economic downturn. However, the air cargo and express segments are expected to see a revival in growth, driven by investments from the PAC program and the construction of new airports and distribution centers for direct connection to the US.

INFRAERO, a public institution headquartered in Brasilia, controls over 90% of the airports in Brazil. It has seven regional business centers located in Belém, Brasilia, Manaus, Porto Alegre, Recife, Rio de Janeiro, and São Paulo. The institution builds, operates and manages 67 airports and 81 navigation support stations. It handles 32 cargo terminals with modern infrastructure and equipment. The INFRAERO airports have a handling capacity of 1.3 million tonnes of international cargo per annum. The largest terminal for cargo volume is the Viracopos International Airport in Campinas, which has an area of 77,000sqm. The terminal of Rio de Janeiro's International Airport has the most equipped warehouse in Brazil. INFRAERO also plans to implement industrial airports alongside existent facilities in Rio de Janeiro, Confines (Minas Gerais), and São José dos Campos (São Paulo), and Petrolina (Pernambuco). The leading Brazilian cargo airlines include Tam Linhas Aéreas, Gol Linhas Aéreas, Variglog, Skymaster Airlines and Oceanair Linhas Aéreas.

INFRAERO has completed several airport projects in Brazil. In the northern region, for example, are the airports Manaus (Amazonas), Macapá (Amapá) and Porto Velho (Rondônia). Other projects under construction include the airports of Maceió (in the state of Pernambuco), Natal (Rio Grande do Norte) and João Pessoa (Paraíba) in the northeast and the new terminal at Victoria Airport in the southeast. In the south, Navegantes (Santa Catarina) has been expanded and internationalized. The International Airport of Viracopos in Campinas and Guarulhos Airport (São Paulo) are also planned to be expanded. In spite of these developments, airport congestion remains a problem.

Brazilian air transport faces price competition and cargo demand from other neighboring countries, leading to lack of regular flights for exporters. Planes sometimes fly empty to neighboring countries, as they get to load better paying cargo.

Figure 12 below sows that the Brazilian air freight industry was estimated to be worth $1,053m in 2008, with a decline of 2.4% over 2007, as it was hit by the global slowdown. The average annual growth rate of the air sector is forecast to be 2.7% over 2008–13. The future is promising, with rising investments expected.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 12: Air freight value and growth, 2004–13

Air Freight Value Air Freight Value Growth 1400 10%

8% 1200

6% 1000

4% 800

600 Growth(%) Value $ Million Value 0%

400 -2%

200 -4%

0 -6% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Figure 13 below shows the air freight volume growth between 2004 and 2013. This low CAGR in the air freight segment is attributable to the dip in air cargo volume in 2008 and 2009, when the Brazilian air cargo and express sectors were hit by the global slowdown and, in 2009, registered growth rates of 0.9% and -9.6% respectively.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 13: Air freight volume and growth, 2004–13

Air Freight Volume Air Freight Volume Growth 1800 6%

1600 4%

1400 2%

1200 0%

1000 -2%

800 -4% Growth(%)

Volume Million FTKs 600 -6%

400 -8%

200 -10%

0 -12% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Figure 14 below shows that the air cargo segment of the air freight industry, worth $475m, is expected to grow at an average annual rate of 3% from 2008–2013. The air express segment is also growing, with widening service options.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 14: Air freight value split by express and non-express, 2008 and 2013

Air Freight Value in 2008 - $1,053 million Air Freight Value in 2013 - $1,201 million

Express Express 54.9% 54.4%

Non Non Express Express 45.1% 45.6%

Source: Datamonitor D A T A M O N I T O R

Table 4: Aviation statistics

Total number of airports 4,000 Airports with paved runways 721 Airports with unpaved runways 3,279 International Freight terminals of INFRAERO 32 Air traffic handled by INFRAERO airports 97% Volume transported by air per year 1.2 million tonnes Revenue for INFRAERO from cargo logistics 26%

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Although air cargo accounts for a small proportion of total volumes in Brazil, the PAC program administered $1.5 billion for the aviation sector in 2010. The program has allocated investments for 20 airports in Brazil to increase cargo capacity from 100 million to 191 million tonnes per year through four new terminals and other expansion projects.

In addition to this, the federal government has planned an investment of $112m at Porto Alegre in the capital of Rio Grande do Sul State, for the construction of a logistics complex. In order to increase multimodal transportation, the government is also investing $193m at Vitória, the capital of Espírito Santo State. INFRAERO has also planned investments to expand and modernize the airports of Guarulhos and Congonhas in São Paulo. Other projects also include areas of Recife, Natal, Goiania, Piauí, Curitiba, Rio de Janeiro, Santa Catarina and Macapá. In addition to INFRAERO, freight operators such as TAM Cargo are involved with installing the largest freight terminal in Manaus, with capacity of more than 80 tonnes and cold storage facilities.

Also, in order to address the challenge of airport congestion, INFRAERO has planned on introducing automated warehousing at the four international cargo hubs of Guarulhos and Viracopos in São Paulo; Galeao in Rio de Janeiro; and Eduardo Gomes airport at Manaus.

In addition to the government owned INFRAERO, the US trade and development agency (USTDA) has also supported projects in Brazil; It has developed a plan for the Brazil Tancredo Neves International Airport, with a grant of $5,73,000.

2.5 Brazilian warehousing market: expected to witness growth, spurred by global investments and increasing 3PL outsourcing

Increasing trade in the Brazilian market is fostering growth in warehousing. Exports and imports for Brazil pass through the main container terminals of Santos (São Paulo); Rio de Janeiro; Rio Grande (Rio Grande do Sul); Paranaguá (Paraná); Vitória (Espírito Santo) and Salvador (Bahia). These ports are connected to the mainland via corridors through highways, roads, and railway terminals for incoming trade from foreign markets, and include warehousing facilities for storage.

Being one of the largest producers of agricultural goods such as soybean and grain, Brazil has extensive warehousing facilities, mostly concentrated at ports and airports and governed and maintained by public institutions such as INFRAERO, and state authorities and port operators.

Most warehousing facilities are operated by the major port authorities, who include refrigerated stores and bonded warehousing. However, private companies such as FedEx also construct and operate bonded warehouses at airports. Mostly the importers utilize the warehouses on a rental basis, depending on the amount of stock being transported. The warehousing facilities at the ports of Brazil are usually utilized for transporting liquid bulk and solid bulk cargo moving through pipelines. For example, exports at Port of Aratu to the northeast of Rio de Janeiro include gasoline, xylene, butadiene, propane, ammonia, and magnesite. Several metal and mining companies such as Fafen and Alcan and magnesita also rent warehouse facilities at the port. Although industries use large warehouses for their own purposes, shared warehousing by different companies, which is prominent in other countries, is only developing in Brazil.

Exporters see the use of bonded warehouses as advantageous, as they can consolidate shipments and distribute at a faster rate. This is because importers are only required to pay duties when goods are moved out of warehouses. Until the goods are cleared, the exporters are allowed to store the goods in bonded warehouses for a period of up to two years. Also, in bonded warehouses, the cost of warehousing is negotiable, with the prices calculated as a percentage of the CIF value of the goods, depending upon the product, its value and the duration of storage. Hence, the advantages in bonded

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

warehouses provide huge scope for the government of Brazil which is encouraging the development of state owned warehouses.

According to law passed in 2001, airports can now install customs warehouses, where industry is able to import parts tax free, and to assemble goods and export finished items. These facilities benefit traders, as they are duty free industrial parks. These are already planned for installation in the industrial airports of Confins, Minas Gerais; Petrolina, Pernambuco; and Galeao, Rio de Janeiro.

As well as this, changing supply chain practices for the storage of high value commodities such as oil are benefitting the warehousing companies in Brazil. As opposed to charging storage, based on industry standards on a per foot basis, Brazil charges the customer as a percentage of cargo. Hence, high value cargo stored in the warehouse for even a month can create huge revenues from oil company fees.

However, in terms of general cargo, air freight customers are involved in reducing inventory level and are trying to inculcate virtual warehousing in their business models. These models reduce inventory by holding goods at transit, rather than at their destinations.

A few examples of global companies setting up warehousing hubs in Brazil include an Indian company named Elgi Equipments Ltd (EEL) and Noble group, based in Hong Kong. The engineering company, which makes air compressors, plans to invest in setting up warehouse and manufacturing facilities outside India. The company plans to invest around $0.03m in Brazil for setting up warehousing facilities. Noble Group has also acquired grain storage facilities in Brazil for $18m, for the storage of soybean, corn and wheat. Other investments have come from agricultural production companies such as ADM, which wishes to invest in expanding its static warehousing capacity by 2,85,000 tonnes in the center west region. It has planned five storage facilities in Mato Grosso to accommodate the produce from its soy processing units. These investments are adding fuel to the rise in third party outsourcing by renting the warehousing space.

Figure 15 below shows that the Brazilian warehousing spend was estimated to be worth $2.9 billion in 2008. Average annual growth rate is expected to be 2.9% over 2008–13. Growth in the warehousing industry is expected to come from the rising investments by global companies setting up operations in Brazil, and to be steered by the governmental development of duty-free warehousing.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 15: Warehousing spend growth, 2004–13

Warehousing Spend Growth rate

4.0 20%

18% 3.5

16% 3.0 14%

2.5 12%

2.0 10% Growth (%)

Value $ Billion 8% 1.5

6% 1.0 4%

0.5 2%

0.0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Figure 16 below shows the growth in warehousing stock at an average annual rate of 1% over 2008–13.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 16: Warehousing stock growth, 2004–13

30 Warehouse Stock Growth rate 14%

12% 25

10%

20 8%

15 6% Growth (%) 4% 10 Stock Million Square Meters 2%

5 0%

0 -2% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

2.6 Brazilian contract logistics market: increasing importance of third-party logistics in demand industries to drive growth

The contract logistics market in Brazil is in development, as outsourcing to third party providers is in its nascent stage. Similar to other emerging markets such as India, third party outsourcing is still limited to specific logistics activities such as transportation or warehousing. Third party providers in Brazil operate on two levels; part of them focus on operational excellence, while others provide integrated solutions. However, as contract logistics remains an emerging market in the country, the scope for integrated solution providers is limited. Logistics service providers offer a wide range of services such as transportation and warehousing and supply chain management activities. However, integrated solutions which encompass value added services are yet to develop. Although Brazil's industrial sector is fast expanding, value added services such as vendor inventory management, distribution management, just-in-time manufacturing and ERP are only just emerging. Although retailers and manufacturers in Brazil outsource their activities for specific solutions, they are receptive to integrated solution providers.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Contract logistics players active in Brazil include DHL, TNT, CEVA, Ryder, Penske logistics and Kuehne & Nagel. A wide range of merger and acquisition activities are increasing the penetration of third party providers to capitalize on the opportunities in the country. M&A activity in the retail and consumer goods industries has consolidated operations of the players in Brazil and has increased the importance of outsourcing logistical activities. Significant partnerships in the logistics sector have also formed: the joint venture between Penske and ABX to set up international integration and global supply chain strategies in the country, and TNT’s acquisition of domestic express company Mercurio for express services are both mergers set to increase opportunities for third party outsourcing services.

Despite the driving forces in Brazil, there remain a few hurdles for the growth of logistics services, such as the tax differences across states and regions, infrastructural bottlenecks and dearth of qualified manpower. This remains a hurdle for setting up distribution centers and transportation across the country. In addition to this, non-uniform regulations in multimodal transportation are increasing the cost of logistics in the transfer of goods between highways, railcars and ports.

Figure 17 below shows that the potential for transport I contract logistics would continue to rise in future, although companies operating with contract logistic operators attach high importance to value added services.

Figure 17: Total contract logistics value split by category, 2008 and 2013

Total Contract Logistics Value in 2008 - $6.9 billion Total Contract Logistics Value in 2013 - $10 billion

Value Added Value Added Services Services, 43% 43% Transport , 39% Transport 45%

Warehousing Warehousing 18% 13%

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 18 below shows the growth in contract logistics value in the period between 2004 and 2013. In 2008, the contract logistics market in Brazil was valued at $6.9 billion. Datamonitor expects that it will experience robust growth, unaffected by the global slowdown. The average annual growth rate of contract logistics value is expected to be around 7.8% over 2008– 13.

Figure 18: Total contract logistics growth, 2004–13

Contract Logistics Value Growth rate 12.0 30%

10.0 25%

8.0 20%

6.0 15% Growth (%) Value $ Billion

4.0 10%

2.0 5%

0.0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

2.7 Brazilian freight forwarding market: imperative for exporters to increase third party outsourcing

The freight forwarding segment comprises freight forwarding and custom clearing agents. This segment is served by domestic companies, port operators and global logistics players such as DHL, CEVA, Penske logistics and Ryder. The prime concerns for clients operating in export and import trade for the Brazilian market are customs clearance, tariff consultancy, consolidation of exports/imports, foreign exchange transactions, insurance services and intermodal transportation.

Freight forwarders are an imperative aspect of the export and import trade in Brazil, especially for exporters outside Brazil; they speed up paperwork and act as intermediate agents for customs. These agents also aid in representing the exporter in case of warehouse storage exceeding given durations. This segment is fragmented, with a large number of both authorized

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and unauthorized agents. However, licensed or reputed agents are sought from the US Department of Commerce, the American Chamber of Commerce in Brazil and various Brazilian Consulates.

Clearance for oil companies is another area where custom agents play an important role; in order to avoid the fees attached to uncleared cargo, exporters are required to understand customs loopholes. Therefore, the exporter needs to ensure that all documents reach customs before cargo leaves for Brazil. This can reduce transaction time and save costs. Exporters usually take assistance from shipping brokers for warehouses in tax free zones, and pursue agents while the brokers keep track of demand via contacts with major commodity shipping companies.

2.8 Brazilian CEP market: witnessing high growth supported by huge network expansion strategies by global operators

The CEP market in Brazil is vibrant. With numerous investments from global express integrators such as DHL, TNT, UPS and FedEx, it is an important trading partner of the US. Demand from the manufacturing and service sectors is also high, increasing the importance of express operators.

The Brazilian express market comprises a number of fragmented domestic players operating in the air and road express segments, as well as international logistic players. The market is highly competitive, with numerous integrators and local firms in operation such as Brazil Post, Espresso Aracatuba, Rapidao Cometa, and Kwikasair Delivery. Services provided by integrators such as DHL, TNT and UPS are increasing competition in the domestic express market.

The Brazilian CEP market was estimated to be worth $2.1 billion in 2008, registering a growth rate of 6.6% over 2007. The market is forecast to grow at an average annual rate of 3.4% over 2008–13.

The burgeoning growth of the Brazilian economy and its trade with Mercosur countries is attracting major investments form global integrators. Global express operators are expanding into Brazil by broadening their network and service portfolios. For example, TNT acquired Mercosur and its delivery arm, Expresso Araçatuba Transportes e Logística S.A, to further its domestic penetration in the central west and north regions. DHL is also investing in fleet and network expansion, with new facilities in São Paulo state and Porto Alegre, and distribution centers in Rio de Janeiro. UPS, in turn, is expanding its service portfolio in the country through its domestic express services available in São Paulo, Rio de Janeiro, Porto Alegre and Campinas. FedEx is also expanding its service portfolio by providing international economy services to benefit small and medium enterprises for less urgent shipments. Moreover, the Argentinian logistics company Andreani is expanding its network in Brazil to connect with the neighboring countries of Chile and Uruguay.

Aside from global logistics operators, the Brazilian postal operator is engaged in fleet expansion to stay abreast of the competitive express market. In light of this, it is undergoing restructuring for cargo operations.

Meanwhile, road express is growing faster than air express, supported by developed road network expansions by TNT, Andreani and others. Road express market value is predicted to grow at an annual rate of 3.8% for the period 2008–13, compared to air express at 2.1%. In view of these developments, players in the Brazilian CEP market are likely to face intensified competition.

Figure 19 below shows the growth of the CEP market in Brazil, which is expected to develop at an average annual rate of 3.4% over 2008–13.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Figure 19: Total CEP value and growth,2004–13

Total CEP Market CEP Value Growth Rate 3.5 16%

14% 3.0

12% 2.5

10% 2.0

1.5 Growth (%) Value $ Billion 6%

1.0 4%

0.5 2%

0.0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

CHAPTER 3 KEY INDUSTRY SECTORS

Logistics management activities are becoming highly important for key industry verticals in Brazil, especially for functions such as tracking visibility, customs clearance, inventory management, order processing and customer service requirements.

The rise in industrial output, coupled with increasing demand for raw materials, natural resources and outsourced logistics from third party players are fuelling the growth. The need for value addition in logistics processes, in support of the demand for lean supply chains and optimization techniques, is expected to further growth in the logistics industry.

3.1 Brazilian automotive logistics: boosted by growing automobile sales, aided by government tax breaks

The growth of the automotive logistics industry in Brazil has been aided by the robust expansion of the automotive sector, up until the recent economic downturn. With around half the population of South America, Brazil’s car parc accounts for around 56% of South American car parc totals. The automobile industry, including passenger cars and commercial vehicles, grew at an average annual rate of 14% and 17% over 2003–08.

The Brazilian industry is the fifth largest automotive industry in the world. National industrial policy, which brought in deregulation and privatization, also attracted a number of global vehicle manufacturers. Major international manufacturers such as General Motors, Volkswagen, Volvo, Audi, Ford, and Mercedes now operate in Brazil. According to the Brazilian Autoparts Manufacturers Association (Sindipeças) 3.5 million vehicles were produced in 2007, with a growth of 21%. Despite the slump in car sales in several economies across the world, sales in Brazil grew in 2008, stimulated by government incentive schemes. The boom in sales was led by the Imposto Sobre Produtos Industrializados (IPI), a federal tax on manufactured goods, as well as industrial production tax breaks issued by the government.

Several auto majors such as General Motors, Volkswagen, and Ford are investing heavily in Brazil. General Motors has planned to reinvest over $1 billion into its product line until 2012, while Volkswagen and Ford are investing huge amounts on capacity expansions.

In addition to meeting the demand from the domestic automotive sector, Brazil also exports auto parts to several other countries in North America and Europe. South America dominates the export market for Brazil, which accounts for 36% of total exports, followed by 30% and 23% to North America and Europe.

Between 2003 and 2008, penetration in Brazil grew at an average annual rate of 4.5%, creating immense potential for growth in the logistics of finished vehicles, auto components and the aftermarket components industry.

Although the Brazilian market is lucrative to vehicle manufacturers, there remain substantial hurdles for growth in terms of logistical efficiency. Auto makers face infrastructural challenges with regard to the low maintenance of roads, congestion in port areas, and soothe less developed rail network in the northern parts of the country. However, the auto makers and automotive associations operating in Brazil are pushing for improvements in ports and roads.

Figure 20 below shows the potential for growth in the automotive sector in Brazil. Car penetration is fairly high compared to other emerging markets, owing to the developed nature of its automotive industry compared to countries such as India and China.

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Figure 20: Growth in car penetration in Brazil, 2003–12

Car penetration Growth rate 200 7%

180 6% 160

140 5%

120 4%

100

3% Growth (%) 80 Cars per 1000 persons 1000 per Cars 60 2%

40 1% 20

0 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Datamonitor D A T A M O N I T O R

The high logistics costs in Brazil owing to less developed railcars, high taxation, and longer transit times are posing a threat to auto makers. They are constantly looking for opportunities to reduce transport costs by reducing inventory, identifying optimized routes, reducing empty miles, and identifying the shortest possible distance for setting up distribution centers and ensuring constant transparency in the delivery process. Consequently, the automotive industry in Brazil sees high need for third part logistics providers (3PLs).

The demand for logistics in the automotive industry lies in sourcing auto components, value added services such as sub- assembly, kitting (collecting and assembling materials that serve as components of an assembled package) and cross docking (unloading materials from a semi-trailer or railcar and loading directly to outbound trucks with minimal storage) in warehouses, transportation of finished vehicles and aftermarket parts delivery.

Auto components delivery to manufacturers grew at an annual average rate of 21% over 2004–08. It mainly involves just- in-time suppliers, which carry out milk runs to the manufacturing centers. Time-bound delivery for premium freight, sourcing from low cost countries, and safety are the most critical aspects of managing supply chains of automobile companies. Specialist logistics service providers are evolving to capture the rise in demand.

Figure 21 below shows the auto part production growth for the period from 2004–08.

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Figure 21: Auto parts production growth, 2004–08

Auto parts Industry Growth rate 45 45%

40 40%

35 CAGR 21% 35% 2004-2008

30 30%

25 25%

20 20% Growth (%) Value $ Billion

15 15%

10 10%

5 5%

- 0% 2004 2005 2006 2007 2008

Source: Datamonitor D A T A M O N I T O R

Most logistics service providers for the automotive industry follow their auto partners around the world to aid them with global connectivity. For example, General Motors' logistics partner Ryder, and Volkswagen’s partner CEVA logistics also operate in Brazil. Some other logistics service providers include TNT logistics, Kuehne & Nagel, Penske logistics, DHL (Danzas Brazil), and Exel. CEVA logistics also transports imported auto parts from all over the world to Renault warehouses or distribution centers in Brazil.

Currently, the demand for a third party logistics player in Brazil continues to revolve around the specific operations of the automotive companies in question. For example, Ford employs a number of third party players for its automotive logistics requirements: Penske logistics aids in deconsolidation or re-packaging; Exel handles transmission of auto parts to China; UTI services operates the transportation for Europe; and NYK logistics handles operations for India. Consolidation of all activities by a single service provider continues to remain in its nascent stage. The absence of well developed intermodal connectivity is a challenge facing both automotive and logistics players, which is consequently marring the penetration of contract logistics in Brazil.

However, similar to other emerging economies such as India, automotive companies in Brazil are shifting from outsourcing rudimentary services to integrated solutions. The demand for auto parts, on an ad hoc basis in inbound logistics, requires just-in-time manufacturing for immediate procurement. Value added services such as just-in-time manufacturing, demand forecasting, inventory management, tracking and tracing facilities, and reducing transit time of shipment release to dealer

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delivery are all gaining importance. Other services include warehouse management, returns and warranty handling and dealer sales order-processing.

The automotive sector demands the detailed monitoring capability of shipments from third party logistics providers. International shipments usually account for the highest proportion of premium freight, attributed to the need to reach the customer immediately. International shipments transported through air or seas require a high amount of visibility throughout the supply chain. This makes the tracking and tracing of shipments an indispensable part of the automotive supply chain, and is driving the increased usage of value added services.

Realizing the potential for value added services in the logistics sector in Brazil, logistic service providers are focusing on partnerships, so as to attain collaborative expertise. For example, TNT logistics has collaborated with TAM Cargo to extend logistic services through air transportation. This partnership is hoped to enhance parts delivery to dealers in the domestic automotive market. As well as this, Penske logistics and ABX logistics have entered into a joint venture in Brazil to bring about integrated logistics supply chains.

3.2 Brazilian pharmaceutical logistics: increased PPP for local manufacturing and new safety regulations attracts 3PL

The pharmaceutical industry in Brazil is witnessing robust development driven by high economic growth, huge population, surge in overseas trade, governmental focus on public health, rise in PPP and rise in R&D investments; as reported by IMS Health, the pharmaceutical industry grew by 23% in 2008 over 2007.

The value of Brazilian imports of pharmaceutical products is higher than that of exports. The total value of exports in Brazil amounted to $961m in 2008, while the value of imports stood at $4.2 billion. Additionally, the local production of generic drugs is very low. The majority of imports come from the markets of the US, Germany and Switzerland. Furthermore, the majority of foreign players such as Novartis, GSK, Roche and Pfizer operate in Brazil, due to its proximity to other Latin American regions. This results in a considerable dependence on foreign markets for drugs, and increases the need to meet the international quality.

FDI for the pharmaceutical market in the first quarter of 2009 increased by five times that recorded in 2008. Besides foreign investments, the government of Brazil has also initiated nine PPPs between public labs and private companies. For example, Wockhardt, one of the largest pharmaceutical companies in India, is entering the Brazil market through a joint venture. Another company, Panacea Biotec, is planning tie ups in Brazil for the distribution and marketing of drugs.

The market is also witnessing private investments by multinational pharmaceutical companies. For example, Novartis is investing $200m in a new facility, while Pfizer is focusing on R&D. In addition to multinational pharmaceutical companies, the local companies of Brazil are greatly increasing their investments in R&D activities for local manufacturing. For example Cristalia, based in Sao, is investing in biotechnology R&D. As a result, the huge amount of investments and increasing PPP for local production is expected to step up demand for logistics in Brazil.

The government of Brazil plays an important role by contributing to a high proportion of the pharmaceutical market. Government purchases account for over 90% of vaccines, 50% of medical equipment and 25% of the drugs markets in Brazil. Consequently, realizing the potential of the Brazilian pharmaceutical market, the government is taking steps on the regulatory front and also upon improving business environment.

There is a major government initiative aimed at changing the pricing models of pharmaceutical products in Brazil, comprising the lowest possible price in the bidding process for medical products. However, according to a recently passed

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bill, pharmaceutical companies that participate in the bidding process require consent from the National Health Surveillance Agency (ANVISA) to increase the quality of products. This is reducing competition for low priced products, ensuring quality and improving access to medication for all sections of society.

However, the logistics suppliers of the pharmaceutical market are not adequately developed to meet national demand. Consequently, most players prefer to outsource their logistics to third-party service providers to ensure safety, comply with local, national and international standards, and ensure timely delivery.

A manufacturer requires the consent of the ANVISA to license its drug products in Brazil. To do so, they are required to follow very high standards of practice and quality assurance. ANVISA, along with the ministry of foreign affairs, also monitors operations in ports, airports and borders to maintain international standards of sanitary surveillance.

In an effort to meet international quality standards, the market has witnessed a number of regulatory changes governing the transport of diagnostic and infectious samples. New regulations meant to address the manufacturing, storage and distribution of clinical trial supplies established by the International Air Transport Association need to be met for transporting internationally. According to these, clinical samples are required to be transported as fast as possible, and with utmost care. As a result, temperature-controlled storage and time sensitive delivery of drugs remain imperative for the successful running of pharmaceutical logistics. The reduction of inventory and order cycle time is critical to achieving low operational costs. Transporting finished products to distributor depots also needs special care in handling processes before delivery to the end-consumer. As a result, just-in-time deliveries have become an indispensible part of the pharmaceutical supply chain.

In addition to limited access to medicines for all groups in society, compared to other regions, Brazil levies high taxes on the pharmaceutical companies, creating difficulties for the key players. For instance, taxes account for around 35% of the final price of the product which is directly passed on to the consumer. Therefore, the pharmaceutical companies in Brazil are forced to reduce their transportation costs, as they account for the major proportion of operational costs.

Security is another major concern for the pharmaceutical industry, due to counterfeiting of products. Non-registered drugs account for around 30% of the drugs in Brazil, which has stirred pushes for more stringent legislation. In light of this situation, the Brazilian government has passed new legislation for the surveillance of medical products, which would police the electronic bar code systems on the prescription, commercialization, production and distribution of drugs. This would result in a spurt in demand for the third party logistic providers equipped with technological expertise in pharmaceutical logistics. Additionally, the implementation of radio-frequency identification technology by third party players, thereby increasing track and trace visibility of the supply chain would play an important role in the industry.

The logistics players in Brazil need to improve their expertise in value added services in order to properly handle pharmaceutical products, although problems of poor infrastructure persist. Demand for temperature mapping, which includes complete tracking of a shipment throughout the supply chain, is mandatory for efficiency in pharmaceutical logistics.

Vertical-specific expertise provided by third-party logistics providers who understand the requirements of the sector is still lacking in Brazil. There is demand, therefore, for expert teams to address supply chain challenges in the pharmaceutical industry, thus increasing the opportunity for logistic providers.

Express companies could benefit from operating in Brazil, driven by the demand for time critical delivery and need for value added services. Margins for express companies could increase through a range of value added services, such as temperature controlled transportation and warehousing, time-critical door to door delivery and visibility through real time

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tracking. For example, UPS has launched the temperature true program, under which, domestic and international freight shipments are transported.

Investments are also increasing on the logistics side. In order to capitalize on demand for growing pharmaceutical markets in emerging countries, logistics players are focusing on their pharmaceutical partners to add value to services. For example, UPS is planning on refrigerated trucks, healthcare compliant technologies and cold storage back up facilities in Brazil.

3.3 Brazilian retail logistics: rising e-commerce and fierce competition in the retail sector creates the need for contract logistics

The retail sector in Brazil is one of the fastest growing segments in the country, having grown by 15% annually from $245 billion to $423 billion between 2004 and 2008. The channels contributing to this include cash and carry, warehouse clubs, duty free retail, department stores, hypermarkets, supermarkets and other retailers and specialists.

The retail sector in Brazil is largely steered by domestic consumption, due to the improving income levels of consumers. The underlying drivers include growth in internet retailing and direct selling of products such as personal care and cosmetics. The market for direct selling is growing, due to the low number of big department stores in the country.

The retail market in Brazil is highly fragmented, with regional and global players. Carrefour, Pão de Açúcar and Wal-Mart are the three major retailers operating in Brazil. These fall under the organized segment of the market, and each maintain a huge operational network.

The big retailers operating in Brazil have their own distribution centers with considerable warehousing space. However, retailers outsource some parts of logistical activities to local logistics companies for transportation of groceries, perishables and non food categories, refrigerated warehousing and stock out management. The other local retail players, apart from Pão de Açúcar, compete with global retailers such as Carrefour and Wal-Mart by operating on smaller margins and providing personalized services to the consumer. In addition to competitive urban areas, local retailers are expanding into the rural areas to have an edge over the foreign retailers.

All the three retailers operating on a large scale basis in Brazil are investing in expansion strategies. For example, Carrefour has planned to invest around $1.4 billion in the Brazilian retail market to compete aggressively with Wal-mart and Pão de Açúcar. While Wal-mart plans to open 110 stores in Brazil, the São Paulo based Pão de Açúcar is investing in 300 new stores over the next three years. These investments are expected to increase the scope for the retail logistics market.

Figure 22 below shows the growth in the retail industry between 2004 and 2008.

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Figure 22: Retail industry growth, 2004–08

Retail Market Growth rate 700 25%

600 20%

500

15% 400

300

10% Growth rate (%) Value in$ Billion

200

5% 100

0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Datamonitor D A T A M O N I T O R

Retailers have a choice of four models of logistics management: in-house logistics and warehousing; partly/completely outsourcing to traditional service providers; partly/completely outsourcing to third-party logistics service providers; and outsourcing to fourth-party logistics providers. However, in the Brazilian context, while outsourcing through 3PL is developing, the penetration of fourth-party logistics players is almost nonexistent.

Contract logistics potential for the retail industry is yet to be fully tapped. There is huge potential for specialized services, such as focus on advisory teams to better manage retail supply chains and provision of value addition in warehousing/ transportation for third-party providers. Also, small retailers lack awareness about the benefits of vertical-specific logistics solutions and relative confidentiality of sensitive information.

However, a high number of mergers and acquisitions in the retail sector are increasingly making third party outsourcing mandatory for firms hoping to reduce costs. Companies consider the third party outsourcing of their logistics activities in order to seek benefits after the integration of operations. For example, the acquisition of local companies by global players to establish their presence in the region involves restructuring activities such as installing compatible technologies in order to match the global retail patterns, maintaining credit portfolio of local defaulted customers and language barriers of the region.

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Improvement in operational efficiency and use of sophisticated technologies is fuelling growth in outsourced. Companies aim to focus on core competence of their activities and outsource their logistics to third party players to reduce their operational costs. Many of them seek the benefits of greater flexibility of operations and reduction of investments in assets.

The internet retailing market is also gaining importance in Brazil, owing to cheaper products being made available online. This is attributed to rising broadband penetration and increased use of sophisticated online payment systems. This is also aided by the lower income group now being able to access the internet. E-commerce would open new avenues for CEP players, due to the rise in procurement of cheaper products from international locations, thereby increasing the need for air express or freight shipments.

3.4 Brazilian hi-tech logistics: Growing investments at 40% in the past year and penetration of foreign players propels demand for value addition

The electronics market in Brazil is exhibiting high growth, driven by factors such as government incentives for innovation in hi-tech and electronics, demand for electronic products for communication, favorable import regulations, entry of foreign players, shifting of hi-tech manufacturing to Brazil and growth in consumer electronics.

Government tax incentives for the production of goods for electronic components involving semiconductors, optical- electronics and respective electronic supply materials are steering industry expansion. These incentives are expected to increase the potential for local manufacturing and would pave the way for increased logistical activities.

Revenues from the electrical and electronics industry grew by 10% in 2008 over 2007, and investments grew by 40% in the same period. Nokia, Microsoft, Dell, LG and others are expanding their operations in Brazil. Some companies such as LG also operate local production bases in the country.

Changes in the country’s import regulations have attracted many foreign players into its electronics market. The government’s planned 88% reduction in import tariffs became favorable for those countries exporting to Brazil. As a result, the electronic components and manufacturing industry is highly dependent on import markets; imports and exports for the electrical and electronic industry stood at $32 billion and $9.8 billion respectively in 2008. Imports grew by 33%, whereas exports grew by 6% over 2007. However, this emerged as unfavorable for local manufacturers. In order to create a level playing field for the local component manufacturers, the electronics association in Brazil has recommended an industrial policy to step up their competitive capability.

Supply chain management is required for the delivery of electronics products, electronic components, lighting, medical equipment and electrical engineering products, all of which have to be handled with care, owing to their high value. The need for logistics service providers in the electronics sector lies in the integration of supply chains from Brazilian distribution centers with those overseas, as electronic companies’ source parts from suppliers for manufacturing. These services are provided by logistics providers who have set up multimodal logistics terminals in port areas, such as Brazil's Suape port in Pernambuco state.

Some electronic companies operating in Brazil outsource their logistic activities to third party providers. Similar to other industry verticals, those logistics partners with a global logistics network continue to serve their industrial partners. For example, CEVA Logistics, which operates as a partner of LG Electronics in Italy, continues its operations in Brazil. These involve services such as reception, verification, warehousing, and remodeling for electric and electronic products. In light of this, the company is investing heavily in radio frequency and warehouse management systems (WMS).

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Additionally, there is a need for the management and co-ordination of customer orders for multiple components sourced from different locations, time-critical aftermarket delivery, managing return of goods, and diagnostic testing and quality control of products.

As high value goods, electronic components require specialized express delivery. The implementation of IT in supply chain management is a prime requirement of the electronic industry. As the Brazilian government is stepping up incentives for local production of IT goods and services, logistics service providers would benefit from further integration with the electronics industry.

Timely procurement of raw materials demands express delivery between warehouses and distribution centers, which becomes a vital advantage for third-party providers with specialized express solutions. Onsite delivery of electronic products to end-consumers involves value added services such as packing, unpacking, identification, personal collection and authentication issues like serial number checks, which are provided by larger, globally operational companies. Vendor inventory management, timely sourcing and procurement of components, information exchange and demand forecasting are critical to building efficiency in the supply chain system of the electronics sector. Thus, third-party service provision offers potential for a wide range of services.

The electronics industry operates lean supply chains which create the need for vendor managed inventory and quick order processing. Inventory optimization in a multi-tier supply chain also demands the use of a third-party provider. Consolidation of multiple orders into one unit for shipment, sub-assembling, kitting and single customs clearance for international shipments is a value added service requirement. The 3PL players are yet to capture this demand, with only a few global players offering value added services in their portfolio.

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CHAPTER 4 KEY THEMES IN THE BRAZILIAN LOGISTICS INDUSTRY

The Brazilian logistics industry has seen several changes over the past few years which have facilitated the country's robust growth trajectory. A wide range of phenomena which had previously been bottlenecks for growth in logistics have begun to resolve.

4.1 Multiple tax structure remains a burden for companies, leading to high logistics costs

Brazil is the largest economy in the Latin American region, driving many logistical players to enter the market in order to establish their networks. The country’s dependence on exports has also increased the scope for potential new entrants in the field. However, the country’s tax structure has long been a challenge for entry of foreign businesses into the transport sector. As well as being a hindrance to new trade opportunities, it has also contributed to an increase in transportation and transshipment costs for operators.

The inequality in the tax structure provides a litigious environment for foreign and domestic players operating in Brazil. There are a range of tax incentives available for exports, in contrast to imports, which are subject to several taxes. On the local front, Brazilian companies are taxed on corporate profits (at around 34%), a federal value added tax is levied on industrialized products (10–15%), and federal social contribution tax of up to 9.2% is applied on revenues. Aside from the federal level, state level taxes are levied on circulation of goods at an average rate of 18%, while on the municipal level, a 5% tax rate is levied as a municipal service tax for operations.

Among these, there exist two value added taxes levied at the state and federal level. ICMS, a value added tax on the circulation of goods and transportation and communication services, is levied when goods move from one place to the other, both within and between states. Intrastate movement of goods is taxed at the rate of 18% and interstate tax is applied from 7–12%. It is also levied on the entry of goods imported from abroad and on communication services. Imported goods are taxed at 18–25% while communication services account for 13–35%. This tax structure is a hurdle for developments in the trucking industry, as a large amount of goods are transported through trucks.

IPI is another value added tax levied at the federal level on the sales and transfer of manufactured and imported products. The normal IPI tax rate is levied at 13–35%, which adds to the operational costs of companies. Thus, companies spend excessively on warehousing and keep stocked inventory, thereby increasing logistics costs. It is believed that the logistics costs for automotive, electronics and food account for around 4–5% and 8%, respectively, out of the total costs for companies.

In light of the high tax burden on transportation and other industrial sectors, the Brazilian government has considered specific tax regimes to ensure better trading patterns. In 2007, the government proposed to replace the five existing taxes (ICMS, federal excise tax (IPI), Program for Social Integration contribution (PIS), Contribution for the Financing of Social Security (COFINS), and fuel tax (CIDE-Fuel)) with the introduction of a single federal value added tax (IVA-F). This is levied on onerous operations on goods and services. However, this tax structure is not so useful for companies operating in Brazil, owing to tax being passed on to the end consumer, which would lead to reduced purchasing power, and consumers would be faced with high prices. This is expected to affect the productivity of Brazil due to an increase in the taxation on consumption, thereby deterring opportunities for logistics. Industries and logistic service providers are pushing the government for an improved tax system to enhance logistics.

However, the government has also initiated special tax regimes to step up industrial activity. RECAP is a special tax regime established for export companies in order for them to acquire fixed assets. These exporters are exempt from the PIS and

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COFINS taxes on acquired capital goods. An exemption on IPI and ICMS is also exercised for the computer, electronics, telecom equipments and automotive industries, to the benefit of developmental projects.

In addition to these, the government is focusing on tapping the potential in the north and north east regions to boost economic activities. A special tax regime for this region has been implemented in order to reduce corporate income tax by 75%. This will improve the penetration of more companies in the highly populated northern region, and directly increase the potential for logistics.

Furthermore, on the logistics front, special customs systems have been implemented, such as the bonded warehouse and a certification for bonded warehouses admitting the permanence of goods held in customs in the local territory that are considered exported, intended to benefit Brazilian companies and promote use of EPZs. Under these systems, a Brazilian company may keep imported goods in a bonded warehouse to forgo the import taxes due. Taxes are only levied when the imported goods are cleared through customs from the warehouse. The rule also applies to some export companies in Brazil allowed to store goods in bonded warehouses upon the approval from the tax authorities. This law ensures that companies can store their goods for a longer period by avoiding part of the applied import and export taxes.

Although the Brazilian logistics industry could further benefit from special tax regimes, a uniform and single tax structure for the federal union and the states would promote logistic efficiency.

4.2 Customs automation through risk management and radar system aids in speeding up clearance

The Brazilian economy is fueled by growing trade with South American and global countries. Its high dependence on imports leads to burgeoning growth in logistics. However, Brazilian logistics costs continue to remain high, due to a cumbersome customs clearance process at ports and airports. High transit time, handling costs and inventory are the main contributors to high logistics costs in international trade.

The export and import process, involving important document preparation, customs clearance and terminal handling, depends heavily on timeliness of the processes. Brazil lags behind many developing countries in its timely custom clearance procedures. Imports, accounting for a major part of trade, have an average transit time of around 14 days, much higher than other emerging economies such as India and China.

In Brazil, document preparation and customs clearance for imports and exports takes the maximum number of days allowed in international trade. Submission of various documents such as the bill of landing, cargo release order, certificate of origin, And technical standard certificates involves a huge deal of paperwork. It is believed that, including losses and insurance, customs and administrative costs make up around 30% of logistics costs overall.

The obsolete and complex customs procedures, large number of inspections, number of less qualified inspectors and limited use of advanced technology in executing the functions, further contribute to the rise in logistics costs. However, the Brazilian government has implemented the customs software Siscomex to manage trade related activities through a single flow of information. The software uses a computerized online system for timely document review, physical inspection and customs release. Although the software helps eliminate difficult processing of documents, it does not include a modern risk management system. In view of this, the government is planning a customs reform strategy to reduce the gross customs release time and selectivity process by 20% for both exports and imports. In addition to this, the application of the radar system for trade has been implemented to check the customs compliance in Brazil, which is also speeding up the process.

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The government is also working on fully automating customs processes, although a partial automation is currently in place. Electronic document review through scanners placed in the ports and the application of the risk management system for screening processes are both planned. Inspection would be carried out before the arrival of goods. Reclassification of identical goods is eliminated through use of Siscomex. Acceptance of shipping documents in foreign languages is also planned. Flexible regulations for exporters trading in foreign currency would facilitate foreign trade, such as allowing the Brazilian exporters to hold up to 30% of export revenue in foreign exchange.

Improvement of the customs clearance process is imperative for the development of the Brazilian logistics industry. Custom reforms and implementation of IT is expected to reduce logistics costs, thereby leveraging growth.

4.3 Conceptualization of logistics platforms, global transparks and existence of EPZs enhancing logistics

The growth in industrial clusters in ports, pressure to reduce logistics costs, need for access to multimodal transport and requirement of supply chain optimization are driving the establishment of logistics platforms and EPZs in the country.

The EPZs provide incentives for the suspension of federal taxes on purchase of raw materials and capital goods, and act as main catalysts for export growth. In the EPZs, the law allows for exemption from some federal taxes such as import tax, excise tax, and a number of social security taxes. Companies operating in specific regions of SUDAM and SUDENE are eligible for exemption from ICMS on sales of raw materials to companies located in EPZs. The government has also signed treaties with countries such as the UK, making such allowances as allowing profits of companies operating in the maritime or air transportation of merchandise or passengers to be exempt from taxes on income.

Brazilian logistics systems implement the concept of logistics platforms well known in the west. Logistics platforms are transportation infrastructures equipped with multimodal networks for transport, warehousing and customs services. These platforms are installed with telecommunication networks for information visibility and ensure streamlined supply chains.

Logistics organizations in Brazil combine the various operations of logistics services into a single integrated system. Some of these organizations include the centers for integrated logistics, Estações Aduaneiras do Interior (EADI), Global transpark and Parana logistics platform. The EADI aids international commerce located in ports and airports including storage and custom documentation. Initiated in the state of São Paulo, the centre for integrated logistics was established for combined operations involving logistics, industrial processing and complementary functions.

Additionally, the concept of a global transpark is widely considered in Brazil to meet the demands of infrastructure, multimodality, information and telecommunication systems, just-in-time manufacturing, bridging the gap between logistics connectivity and industrial requirements. This ensures connectivity between suppliers and manufacturers both in the domestic and international locations. Multiple facilities such as cargo transfer systems, central cargo facilities, intermodal rail facilities and connectivity to other transparks for industrial air commerce help provide a total integrated logistics solution system.

The emergence of these parks allows for cost savings through accommodation of huge logistics infrastructure and provision of centralized warehousing. These parks are built conveniently near rail terminals, shipping container terminals and airports, to enable integrated multimodal transport networks and to promote hassle-free logistics management.

Logistics platforms developed by private players would enable segregated trade zones for specific segments of logistics such as mass warehousing, distribution, value added services, and cold storage.

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Preferred locations for setting up these multimodal integrated logistic systems are concentrated in the well developed southern part of the country (mainly São Paulo, Parana, port of Suape, Santos).The multimodal logistics platform in Goias is an integrated logistics platform with connectivity to road, rail and ports. In addition to focusing on building specific highways, railroads, ports and airports, government involvement in constructing hubs combining all modes would foster the logistics industry in Brazil.

4.4 Untapped potential in the application of IT for logistics, despite an annual growth of 11%

The market for IT is growing with the rise in domestic consumption of IT related products and services, broadband penetration, business requirements for advanced technology, availability of loans and huge need for telecommunication services in Brazil; specifically, the market is expected to grow at an average rate of 10–11% over the period from 2008–13.

The Brazilian government has marked IT as a key area for growth in its PAC program. The tax incentives for its application in specific sectors of business act as an important growth driver in the country's logistics industry. The investments are most concentrated in the southeast region, followed by the center, west, and north eastern parts of the country. It is also believed that application of information communication technology (ICT) in the transport sectors would reduce carbon emissions by a large amount. Following this, IT investments in the transport sector are expected to increase, in order to focus on sustainability and environment friendly logistics supply chains.

Logistics management is becoming increasingly complex. The use of IT facilitates the simplification and integration of logistics activities such as transportation, warehousing and inventory management, as well as value added services. Brazilian logistics service providers have the distinct advantage of having the largest IT industry in Latin America to rely upon for improving their management. These applications can also result in a proliferation of data. The ability to harness these data can become a key competitive advantage for logistics service providers.

Globalization, proliferation of e-commerce and emergence of new technologies has modernized the Brazilian logistics industry. Both B2B and B2C e-commerce are driving the Brazilian logistics market, thereby leveraging the IT services for express, which attach high importance as part of value added services.

The application of value added services through the utilization of IT services is critical to reducing logistics costs in the Brazilian industry. Value added services such as the track and trace facility, vendor managed inventory for automotive, retail sectors, and WMS involve the application of IT. Although the IT industry is well developed in Brazil compared to other Latin American markets, the application of IT in logistics is in its nascent stage.

The contract logistics players or international logistic providers such as CEVA Logistics, DHL, Ryder, Rhenus, TNT bring management services with them through IT. For example, Oracle is DHL’s global partner in IT support activities for logistics. It aids in the acquisition of information and creates transparency in logistics management activities. The distribution center in São Paulo is equipped with radio frequency technology, along with data collection and vehicle terminals in trucks. This creates coordination with other distribution centers and improves visibility throughout the process.

At the same time as meeting the demand for logistics management services through IT for Brazilian companies, foreign players are benefitting by providing value added logistic solutions. For example, TNT has acquired contracts from Brazilian companies such as Braskem and Votorantim Celulose e Papel in the chemicals, plastic, petrochemicals industrial segments, for value addition in warehouses. This is expected to drive third party outsourcing more rapidly, with special preference to logistic players operating with technical expertise in logistics management.

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Global logistics players entering the Brazilian market would benefit from this, with respect to differentiation in their logistics services by IT applications, thereby meeting the demand for optimized supply chains for specific industries and create a level playing field to compete with global players. However, many Brazilian transportation companies still lack the implementation of IT in their services and would therefore face huge competition from foreign players.

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CHAPTER 5 COMPETITIVE LANDSCAPE AND KEY PLAYER PROFILES

The Brazilian logistics industry is characterized by large number of small unorganized players performing various logistics activities. These include individual truck operators, couriers, freight forwarders, port clearance operators, custom brokers, warehousing and so on. As such, the market is highly fragmented compared to the developed countries such as the USA, UK, Germany and so on where the logistics markets are well organized.

Increasing globalization, rapid industrialization and robust Brazilian economy has made the Brazilian logistics market globally attractive. Although infrastructure is an impediment to growth, foreign players from across the world such as China, India and Spain are working on the infrastructure to make it viable for logistics. Several partnerships between domestic and international players have helped to increase the share of organized logistics in Brazil. For example, many foreign third party players such as Ryder Logistics, Penske Logistics, UPS Worldwide, Redwood Systems, and American Consolidation Services (ACS) have established their operations in Brazil. However, this share is comparatively lower than the other developed countries; thereby increasing the logistics spend that amounts to 12.5% of the country’s GDP.

Global reach, value added services and intermodal transport are key areas of growth for LSPs

Being the most sophisticated logistics market, after Mexico in Latin America, the companies in Brazil are further looking to develop better ways of executing logistical functions. The Brazilian companies are incorporating structured practices to improve their supply chain efficiency. Third party outsourcing is therefore increasing in Brazil attributed to domestic companies with international presence, realizing the importance of streamlined supply chains. Ryder’s acquired company Translor is providing services to Brazilian automotive manufacturers with operations spread across Mercusor countries. It also aids in cross border automotive parts delivery between Argentina and Brazil.

One important factor that is increasing demand for outsourcing is global reach. Majority of the Brazilian companies rely on the foreign players to reach global destinations, however the remaining players outsource it to smaller logistic operators. Global logistic operators benefit from this, as they accumulate large volumes and gain economies of scale. To respond to this demand, a large number of third party logistic providers operate in Brazil. These players include DHL, TNT, FedEx, Panalpina, CEVA Logistics, Ryder Logistics, Rhenus Logistics, who have established their presence in the fast growing Brazilian market.

Another factor of importance to reduce logistics costs is the connectivity to different modes of transportation. Most of the Brazilian firms operate on their exclusive expertise for their in-house logistical activities. For instance, most of the mining and steel companies operate their own networks and manage their logistics through established railroad and port connectivity. Some of the players in this regard include railroad operators such as CVRD, ALL and so on. These players serve in establishing intermodal transportation networks for logistical efficiency. Some of them also exercise control over the port terminals to execute export and import functions. These services are also provided by contract logistic players operating in Brazil such as CEVA Logistics, Penske Logistics, Ryder, Panalpina and so on who are complete solution providers. Intermodal network connectivity is therefore an important requirement to attain competitive advantage for companies operating as third party logistic players.

However, global players gain on the provision of value added services such as inventory management, track & trace facility, consolidation and deconsolidation, cross docking and so on as their differentiating factor against the other local third party providers. Most of the companies operating in manufacturing, retail, electronics have global ties with global contract logistic players who serve them with the requirement of value added services. These companies gain over the others through their technical expertise in rendering logistic management services. Thus, there remains huge scope for consolidation in the market through reliance on global players coupled with the rise in demand for contract logistics. This is attributed to the fact that not

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

many local providers serve this segment of the market, with expertise in value added services. As a result, companies operating in Brazil are competing on factors such as global presence; value added services and intermodal transport services, making the market more competitive.

Growth in third party outsourcing leading to consolidation in specific segments of logistic market

Adjoining the growth in demand for express and logistics services in Brazil, some part of the market is heading toward consolidation. The market has seen acquisitions and partnerships between global players and domestic companies in specific segments of logistics. For example, recently TNT acquired the Brazilian company Expresso Araçatuba Transportes e Logística to enhance its cross country trade with Chile and Argentina. Furthermore, TNT has also established a South American road network connecting 30 cities across 3000 kilometers. Another example includes the joint venture between Penske Logistics and ABX Logistics for air and sea freight management services. Another instance is the partnership between TNT Logistics and TAM Cargo for the company to benefit from the air transportation services for production sites in Brazil. In view of this, the logistics market is moving towards consolidation in specific sectors such as CEP and the contract logistics to establish pan regional logistics networks.

In addition to the above, five companies in Brazil have merged to become a single entity to provide logistic services to customers in automotive, technology, pharmaceutical, alternative fuels, and food industries. A single company named Trafti (with annual revenues of $123m) has been formed by the consolidation of five local logistic firms Ajofer, Fantinati, Trans- Postes, Transvec and Mestralog. This local firm is planned to operate in air and maritime services within southern Brazil. It is expanding into the north, north eastern and other South American countries.

Although these developments in the Brazilian logistics market would step up consolidation in specific segments, the competition between companies continues to rise in Brazil, with companies vying to increase profit margins. Local companies in Brazil lack technical expertise in providing logistics services matching the global standards. Global Logistic companies in Brazil are bringing in world class logistic practices which would eventually benefit the customers.

However, a level playing ground would only evolve if the domestic players adopt similar technologies and provide improved supply chain solutions in executing the logistical functions. While foreign companies entering Brazil would capitalize on the surge in demand, it is imperative for local companies to gain technical expertise, expand networks and implement new strategies to sustain themselves in the Brazilian logistics market.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

5.1 Company profiles

Table 5: America Latina Logistica profile

Business description ALL is the largest independent logistics operator in Latin America, operating its own rail network, locomotives, railcars, highway vehicles, distribution centers and warehousing facilities. It serves the seven ports of Brazil and Argentina. In addition to rail transportation, the company also provides domestic and international intermodal door to door transport, and fleet and warehousing services. Offices Brazil, Argentina Annual revenue Approximately $1.1 billion

Number of employees Approximately 8,943 employees Fleet size/asset information The company’s fleet is comprised of 1,060 locomotives, 31,000 railcars, 70 road-railers, 1,000 proprietary and aggregate vehicles. Strengths With its strong rail network coverage and intermodal connectivity, the company provides full service logistics. It is the dominant service provider for agricultural commodities (64% of revenues). Strategies Focus on complete integrated logistic activities with dominance in rail and network expansion through acquisitions. Investments/deals Invested over $360m in new rail tracks, locomotives, yards and IT solutions.

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Table 6: Vale profile

Business description Vale is a mining company operating in the making of mineral ingredients for global supply chains. It also functions as a logistics service provider and works on generation projects of energy consumption. Offices Brazil, Canada, Australia, China, Singapore, South Korea, Japan, Switzerland Annual revenue Approximately $38 billion

Number of employees Approximately 60,000 employees Fleet size/asset information The company’s integrated logistics network operates 10,000km of railway, five port terminals, and road and rail terminals. Strengths The company’s logistics infrastructure for general cargo, maritime, port and shipping services. Its strong network of railroads terminals and a vast coverage of specific sectors of agriculture, fuel and chemicals, construction, steel, forest products and ornamental. Strategies Supports the logistics activities of domestic market through rapid construction of railroads, storage capacity. Also focuses on the export corridors for regions of agricultural potential. Investments/deals The company plans to invest $300m in a corridor stretch of the railroad between Corinth and Pirapora mining in the northwest. Development of integrated terminals for effective logistic handling. An investment of $2.6 billion in the marine terminal and extension of the Carajás railway to connect to the mountains to the south.

Source: Datamonitor D A T A M O N I T O R

Table 7: MRS Logistics profile

Business description MRS Logistics is a concessionaire that operates the south eastern federal railroad. It owns a network of 1,643km of railways contributing to about 65% of the country’s GDP. Offices Brazil Annual revenue Approximately $1.6 billion

Number of employees Approximately 3636 employees Fleet size/asset information The company’s integrated logistics network operates 1,643kms of railway, 26 locomotive plants and 31 wagons. Strengths Strong customer base including mining, steel and metallurgy, civil construction, chemical and petrochemical, pulp and paper, agriculture, automotive, containers, shippers and logistics. Strategies Partnerships with logistics operators in highway, enabling connectivity with maritime ports and intermodal terminals. Providing complete integrated logistics solutions with door to door transportation. Investments/deals MRS is investing in diversification of freight from trains and loading them to ports. It has also launched three multimodal transportation plans for automotive giants such as GM, Volkswagen and Daimler.

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Table 8: Companhia Siderúrgica Nacional profile

Business description CSN operates as the largest steel producer in Latin America. It also focuses on mining, infrastructure for logistics and energy and cement sectors. In addition to being a distributor of steel, iron ore, limestone, dolomite mines, the company is also active player for commerce in the port terminals and railroads. Offices Brazil Annual revenue Approximately $13 billion in 2008 Number of employees Approximately 22,722 employees Fleet size/asset information NA Strengths CSN manages the logistical activities for steel making and mining. Its main strength lies in the operating the terminals at the ports of Sepetiba, Rio de Janeiro State. It also holds stakes in railroad companies in southeast and northeast Brazil. Strategies CSN focuses on improving and modernizing the port terminals as cargo hubs. Its works are focused toward the construction and maintenance of tracks with stakes in railroad companies for cargo transportation. Investments/deals CSN plans to invest about $2.2 billion to expand the logistics platform at the port of Itaguai in Rio de Janeiro State. It also plans to expand the Sepetiba TECON container terminal for a capacity of 1.3 million TEUs per year and the TECAR coal terminal, to hold a capacity of 100 million tonnes per year. In addition to this, it is also creating a logistics centre and a private port Logo da Pedra. The construction and recovery of Nova Transnordestina railway system connecting the plains of Piauí to the ports of Pecém, Ceará State and Suape, Pernambuco State

Source: Datamonitor D A T A M O N I T O R

Table 9: TAM profile

Business description TAM is the largest airline for air transportation in Brazil. Offices Brazil Annual revenue Approximately $5.9 billion in 2008. Number of employees Around 23,871 employees Fleet size/asset information TAM Cargo operates a total fleet of 129 aircrafts and uses Airbus A330, A340, Boeing B777 and B767 for international destinations, with frequency of operation at 700 daily domestic and 100 international. Strengths The company operates flights to 42 destinations across Brazil. Through partnerships with regional companies it flies to 72 different destinations. It has direct flights to 18 international destinations. Strategies With its subsidiaries, TAM Cargo, TAM Mercosur for the cargo and shipping services, the company is focusing on new cargo terminals through air and road freight. Investments/deals The company is extending partnerships with the US Airways and Brussels airways for customer loyalty programs.

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Table 10: CEVA Logistics profile

Business description CEVA Logistics is an end to end logistics solution provider which executes the supply chain operations for national and international companies. It has been formed by merging operations of two companies TNT Logistics and EGL. Offices Operates across more than 100 countries Annual revenue Approximately $2.8 billion in 2007 (Americas) Number of employees Around 6,600 employees in Brazil Fleet size/asset information 49 distribution branches, 4,25,000sqm of warehouse area Strengths Operates as a lead logistics provider for inbound logistics, production support, outbound logistics, logistics post sales, specialized services with the implementation of software tools, handles return of goods, supportive functions such as call centers. Strategies Contract logistics through provision of freight management, value added services such as kitting, cross docking, consolidation, customs clearance, specialized expert teams to aid in logistics efficiency. It offers services to multiple segments such as technology, industrial, retail & consumer goods, pharmaceuticals, energy, banking and petrochemicals. Investments/deals The company signed a deal with GKN Driveline for the supply chain solutions of automotive and aerospace industries with tracking and monitoring systems.

Source: Datamonitor D A T A M O N I T O R

Table 11: Variglog profile

Business description Variglog provides logistics management solutions by integration of storage, transport, delivery of parcels and goods. It delivers through charter, express and cargo transportation. Offices Brazil Annual revenue Approximately over $500 million Number of employees Between 1000–5000 employees Fleet size/asset information Operates through 285 franchisees with over 107 aircrafts Strengths The company operates in the air cargo transportation area with a wide range of services such as express delivery on the same day, next day, door to door, airport to airport delivery services covering around 3000 cities in Brazil. Strategies Network expansion through partnerships in regions such as Europe and US. Investments/deals NA

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Table 12: Panalpina profile

Business description Panalpina functions as an end to end supply chain solution provider for logistics, forwarding, intercontinental air and ocean freight services across the world. Offices Spread across 80 countries with 500 offices Annual revenue Approximately $878m in South and Central America forwarding business Number of employees Around 13,500 employees globally Fleet size/asset information NA Strengths Global coverage of air, ocean freight services, provides hub and sub hub structure, integrated road and rail feeder and provider of value added services such as order management, vendor managed inventory, kitting, repackaging, reverse logistics, return packages and so on. Strategies The company focuses on all industry verticals such as automotive, healthcare, hi-tech, retail and fashion, oil & gas, telecom with specialized expert teams for better supply chains. Investments/deals Panalpina has signed a deal as the logistics partner for inbound cargo with track & trace facility and also operate ocean charters for heavy sized facilities with VSB (Vallourec & Sumitomo Tubos do Brasil) which is a crude steel production company.

Source: Datamonitor D A T A M O N I T O R

Table 13: TNT Express profile

Business description TNT Express operates express delivery services for parcels, documents and freight items across the world. Offices Operates in 200 countries Annual revenue Approximately a global revenue of $16 billion in 2008 Number of employees Around 8,700 employees globally Fleet size/asset information 130 Brazilian depots, 3 international branches, 7 hubs, 3400 vehicles, coverage of more than 4000 cities, 80 franchises. Strengths Global coverage, provides delivery of next day, expedited, standard with well established road network, door to door service with money back guarantee. Strategies It is one of the first providers of domestic and international services and total domestic coverage in Brazil. The company focuses on industry verticals in Brazil such as chemical, pharmaceutical, automotive, industry perfumery, cosmetics and toiletries. Investments/deals TNT acquired Brazil's Expresso Araçatuba, its logistics delivery partner in Mercurio in 2009 and gets a hold on South American road network (transportation between Brazil, Chile and Argentina).

Source: Datamonitor D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

CHAPTER 6 APPENDIX

Table 14: Brazil’s industrial electrical and electronic revenue

Total revenues by sector in $m 2007 2008 2009

Industrial automation 3,097 3,446 2,861

Electrical and electronic 10.150 9,500 8,645 components Industrial equipment 15,541 18,369 16.165 Generation, transmission and 10,599 11,919 10,489 distribution of electricity Computers 31,441 35,278 35,278 Electrical equipment installation 7,646 8,323 8,406 Telecommunications 17,465 21,546 17,452 Home electronics 15,773 14,710 12,945 Total 1,11,711 1,23,092 1,12,240

Source: Abinee Brasilia D A T A M O N I T O R

Table 15: Brazil’s industrial electrical and electronic exports by economic blocs

Total exports in $m 2007 2008 2009

US 1,846 1,776 1,250

Argentina 2,116 2,293 1,839 Other Latin American regions 2,826 3,042 1,963 EU 1,072 1,146 833 China 98 131 166 Other South East Asia 244 296 259 Other parts of world 1,081 1,206 890 Total 9,283 9,890 7,200

Source: Abinee Brasilia D A T A M O N I T O R

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Table 16: Brazil’s industrial electrical and electronic imports by economic blocs

Total Imports in $m 2007 2008 2009

US 3,388 4,055 3,215

Argentina 270 319 232 Other Latin American regions 487 819 586 EU 4,408 5,727 4,655 China 6,710 9.808 7,248 Other South East Asia 8,008 10,221 7,070 Other parts of world 783 1,084 995 Total 24,054 32,033 24,001

Source: Abinee Brasilia D A T A M O N I T O R

Table 17: Automobile exports in Brazil 2002–06

Category 2002 2003 2004 2005 2006

Heavy commercial 5,475 12,820 25,369 38,312 38,188 vehicles

Light commercial 42,250 72,883 1,13,964 1,55,603 1,52,782 vehicles

Cars 3,69,925 4,40,957 4,97,291 6,84,260 6,35,851

Buses and minibuses 6,765 9,320 12,944 18,969 15,991

Source: Ministry of Transport (ANTT) D A T A M O N I T O R

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Table 18: Automobile imports in Brazil 2002–06

Category 2002 2003 2004 2005 2006

Heavy commercial 2,180 1,603 2,135 2,968 3,328 vehicles

Light commercial 37,836 24,874 27,570 41,297 55,468 vehicles

Cars 75,168 47,219 32,011 43,849 82,935

Buses and minibuses 60 107 6 12 45

Source: Ministry of Transport (ANTT) D A T A M O N I T O R

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Table 19: Rail cargo transported by road in tonnes

Railroad Operator 2002 2003 2004 2005 2006

America Latina Logistica do Brazil 18,573 19,556 20,088 21,677 28,942 SA

Northeastern Railway Company 1,249 1,264 1,261 1,420 1,519 SA

Estrada de Ferro Carajás 58,906 63,259 74,268 80,633 92,587

Estrada de Ferro Vitória a Minas 113,580 118,512 126,069 130,962 131,620

Ferrovia Centro-Atlantica SA 21,979 21,601 25,384 27,557 15,177

Railroad Novoeste S.A 2,465 2,229 2,709 3,497 3,355

Railroad Paraná 1,601 1,752 1,458 1,483 1,511

Ferrovia Tereza Cristina S.A 2,496 2,302 2,459 2,403 2,627

Railways Bandeirantes SA 20,659 23,411 20,545 4,438 4,221

Railways northern Brazil 4,545 5,047 5,583 6,380 5,551

MRS Logística SA 74,788 86,178 97,952 108,142 101,998 TOTAL 3,20,841 3,45,111 3,77,776 3,88,592 3,89,109

Source: Ministry of Transport (ANTT) D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Table 20: Rail cargo revenue by road in $

Railroad Operator 2002* 2003* 2004* 2005* 2006*

America Latina Logistica do Brazil 288,107 379,623 428,312 515,958 638,037 SA

Northeastern Railway Company 15,212 20,621 28,567 31,484 33,594 SA

Estrada de Ferro Carajás 448,341 631,789 788,992 1,033,883 1,019,177

Estrada de Ferro Vitória a Minas 817,698 988,588 1,202,541 1,437,965 2,016,058

Ferrovia Centro-Atlantica SA 217,739 285,729 370,087 450,467 477,147

Railroad Novoeste S.A 29,369 28,190 34,259 45,149 62,537

Railroad Paraná 9,834 11,582 7,551 7,724 8,552

Ferrovia Tereza Cristina S.A 13,606 12,599 16,519 18,445 20,986

Railways Bandeirantes SA 70,057 81,965 105,567 111,803 117,137

Railways northern Brazil 136,736 207,936 243,268 302,576 250,773

MRS Logística SA 599,193 750,570 903,301 1,113,471 1,266,720

TOTAL 1,47,4185 1,89,3894 2,30,0494 2,82,4203 3,29,3216 * Applied exchange rate of 2008 for reais to $

Source: Ministry of Transport (ANTT) D A T A M O N I T O R

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

Definitions

• Air express – a sub-segment of air freight. Refers to the wider CEP market (including express freight) for shipments up to 1,000kg, with time-definite service component. This does not include mail.

• Air freight (cargo) – a broader term than express and includes shipments that are heavier than parcels and whose delivery is not time-definite.

• Air freight – refers to the combined market of air express and air freight (cargo).

• B2B – refers to revenues and volumes generated from transactions between companies.

• B2C (includes C2C) –refers to revenues between companies and consumers (including online auctions).

• Contract logistics – refers to bundled logistics services tailored to customer needs. Contract logistics can be classified into contract warehousing, contract transportation and contract management. These services are provided by third-party logistics providers.

• Domestic – refers to volumes, which are collected and delivered within the same country.

• Economy – refers to revenues/volumes generated from ‘day uncertain’, ‘standard' or ‘deferred' services (i.e. neither non-day nor time guaranteed services) depending on terminology. Economy includes less time-sensitive services without a specific delivery time promise (and can include basic postal parcel volumes). This type of service is not guaranteed.

• Express market – refers to the wider CEP market (including express freight) for shipments up to 1,000kg.

• International – refers to volumes, which are collected in one country and delivered to another.

• Logistics market – refers to the combined value of all transport modes, warehousing and contract management services.

• Narrow express – a subset of the express market which refers to the market for small packages, typically below 31.5kg or 70kg (depending on carrier/service/destination).

• Premium – refers to revenues/volumes generated from same day and time and day definite (guaranteed) services.

• Rail freight – refers to the freight carried by country’s railway lines.

• Road express – a sub-segment of road freight which refers to the wider CEP market (including express freight) for shipments up to 1,000kg, with a time-definite service component. This does not include mail.

• Road freight (cargo) – a broader term than express and includes shipments that are heavier than parcels and whose delivery is not time-definite.

• Road freight – refers to the combined market of road express and road freight (cargo).

• Same day – refers to urgent (non-network) packages, which are delivered typically within 24 hours of collection and offer a full money-back guarantee (it excludes messenger/pushbike type companies).

• Sea freight – refers to the freight carried in container ships.

• Time and day definite – refers to volumes delivered at a specific day/time after pick-up. This type of service is guaranteed, sometimes with a money-back guarantee.

• Warehousing – refers to the rental value of the industrial warehousing space available in the country.

Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010

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Brazil Logistics and Express Outlook 2009 DMAU0424/ Published 02/2010