Brazil

Brazil in the Automotive World

5th Largest Country in the world (by total land area and by population) Worlds 6th Largest Economy: GDP~USD 2.4T just ahead of the UK

World Bank: U.S. GDP USD 14.6T; China USD 5.9T; Japan USD 5.5T; Germany USD 3.3T; France USD 2.5T

Diversified economy: global leader on several commodities (mining, agricultural) yet with a sizable and diversified manufacturing base, strong oil and gas industry (global leader in offshore drilling), and a very strong financial services industry

Economic reforms and stability enabled the rise of a middle-class: pent up demand and consumer boom. Additionally, Brazils economy is riding the worldwide boom in raw materials driven by Chinas emergence

Brazil reached investment grade (first in 2008 - Standard & Poors and Fitch) Energy Matrix: Primarily Hydro, followed by Thermo (including Biomass and Fossils),

and minimum Nuclear. Expansion through private producers and secondary market. Brazil is in the middle of a catch-up campaign in infrastructure investments Brazil will host the FIFA Soccer World Cup in 2014 and the Olympic Games in 2016 Recent discover of new deep-sea Oil reserves (pre-Salt) and continued development of

Ethanol fuel. Self-sufficiency and excess reserves impact geopolitics Brazilian Companies are increasing their presence around the globe

Brazil: Economic Overview

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According to Goldman Sachs projections, Brazil could have the world's 4th largest economy by 2030. EM Equity in Two Decades: A Changing Landscape, Goldman Sachs, September 8, 2010

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Brazil to the Automotive World

The long-awaited rise of Brazil

An estimated 39.5 million Brazilians climbed to the middle class between 2003 and May 2011... Currently, 105 million Brazilians belong to a rising middle class, with household income in the range of US$9,000 to US$38,748 per year Almost 40 million Brazilians climbed to middle class in the last eight years MercoPress, 28 June 2011

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Some private economists forecast that the country will have to spend some $700 billion to a trillion dollars to get roads, airports, sewers and sports facilities ready for both the 2014 World Cup and the 2016 Olympics. Growing Middle Class Fuels Brazil's Economy, CNBC.com, 28 Apr 2011

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Brazils Challenges

Overall key challenges ahead Restructure Fiscal Budget (shift to

capital versus current expenditures) so as to permit sustainable reductions of interest rates

Resolve infrastructure bottlenecks (stressed by global sporting events)

Execute significant tax/labor reforms Contain the rise of organized crime in

urban areas, and Further reduce the country's wide

income inequalities.


Age 2010 (%) 100+

95 to 99

90 to 94

85 to 89

80 to 84

75 to 79

70 to 74

65 to 69

60 to 64

55 to 59

50 to 54

45 to 49

40 to 44

35 to 39

30 to 34

25 to 29

20 to 24

15 to 19

10 to 14

5 to 9

0 to 4

Men Woman


Age 2000 (%) 100+

95 to 99 90 to 94 85 to 89 80 to 84 75 to 79 70 to 74 65 to 69 60 to 64 55 to 59 50 to 54 45 to 49 40 to 44 35 to 39 30 to 34 25 to 29 20 to 24 15 to 19 10 to 14 5 to 9 0 to 4

Men Woman

In the last 10 years: demographics boom

Brazilian Demographics

Source: IBGE

PresenterPresentation NotesThe elderly population is growing at nearly triple the rate of Brazils overall population, according to PNAD/2009. There are several impacts associated with the aging of the population. Brazil could suffer of lack of professionals for jobs that require less skills. Another relevant impact refers to the social security system, that will have to undergo reforms to increase the retirement age.


Challenges current and future Health expenditures and costs tend to

rise Social security system will have to

undergo further reforms, as it is already in a significant deficit which tends to increase

By 2050, at least 30% of the population will be at least 60 and life expectancy will reach 81 years of age.

Brazilian Demographics

Source: IBGE

PresenterPresentation NotesThe elderly population is growing at nearly triple the rate of Brazils overall population, according to PNAD/2009. There are several impacts associated with the aging of the population. Brazil could suffer of lack of professionals for jobs that require less skills. Another relevant impact refers to the social security system, that will have to undergo reforms to increase the retirement age.

28%


Brazilian household income

Inequality of income distribution in Brazil decreased 5.6% and the median real income rose 28% between 2004 and 2009.

Lowest unemployment (5.8%) since 1970.

0

100

200

300

400

500

600

700

800

2001 2002 2003 2004 2005 2006 2007 2008 2009*

Average income per capita BRL per month

The average income per capita started growing in 2004 after a period of stagnation

Source: IPEA

456789

1011121314

Mar

-02

Oct

-02

May

-03

Dec

-03

Jul-0

4Fe

b-05

Sep

-05

Apr

-06

Nov

-06

Jun-

07Ja

n-08

Aug

-08

Mar

-09

Oct

-09

May

-10

Dec

-10

Jul-1

1

Unemployment - %

PresenterPresentation NotesThe change in the distribution of income was largely driven by economic growth and job creation, and also by demographic changes and the slow increase in the schooling of the adult population.

The Brazilian Banking System


Brazilian credit /loan volume and market interest rate

Strong sector historically continues to boom

136 170 249 337

481 669 708

969 1147

80.3

68.4 67.3

57.2

45.8

60.4

44.4 44.1

49.7

0

200

400

600

800

100 0

120 0

140 0

2003 2004 2005 2006 2007 2008 2009 2010 2011*0.0 %

10. 0%

20. 0%

30. 0%

40. 0%

50. 0%

60. 0%

70. 0%

80. 0%

90. 0%

Brazilian credit and loan volume (USD bn) Interest Rate (yoy % change)

Source: Falke Information * values from August 2011

Significant credit

growth with positive impact on the economic activity

Still interest rates are amongst the highest in thr world

Investments in Brazil

Issue/trend


Expansion of the economy in 2012 will be led by investment, which will grow more than household consumption. This situation will contribute to sustained growth in the country's productive capacity.

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

Energy and Telecom are important elements of the infrastructure improvements that the country is required to perform in the next years.

Source: Brazilian Central Bank

Positive outlook for investments

Source: Ministry of Finance

PresenterPresentation NotesAs per the World Investment Prospects Survey (2010-2012), released by Unctad, Brazil is the third most attractive destination for FDI by transnational corporations in the world, behind China and India.


Issue/trend


Foreign Direct

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

0

10

20

30

40

50

60

70

USD

Bill

ion

Foreign Direct Investments - Inflows


Strong FDI from diversified inflows

PresenterPresentation NotesAs per the World Investment Prospects Survey (2010-2012), released by Unctad, Brazil is the third most attractive destination for FDI by transnational corporations in the world, behind China and India.

Issue/trend



Metallurgy, 11%

Non-metallic mineral, 9%

Food , 4%

Coque, oil & biofuels, 5%

Other industry, 12%

Telecom, 19%

Electricity, gas & others, 10%

Financial services, 6%

Other services, 12% Oil and gas, 5%

Mining of metal ores, 5%

Activities to support extraction of minerals, 1%

Other (Agriculture,

livestock, mineral), 1%


FDI per sector (Jan-Jun/11)


Issue/trend


FDI per country (USD million)

2009 2010* Jan-Nov/2011* Netherlands 6 515 6 702 16 576 United States 4 902 6 144 7 784 Spain 3 424 1 524 7 742 Japan 1 673 2 502 7 444 France 2 141 3 479 2 680 United Kingdom 1 032 1 030 2 625 Hong Kong 34 83 2 075 Canada 1 372 751 1 565 Luxemburg 537 8 819 1 548 Austria 48 3 420 1 462 Others 10 001 18 129 10 748 Total 31 679 52 583 62 249



* Preliminary data


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

2012 FDI Confidence Index the turn of the emerging markets

Issue/trend

Low confidence

High confidence (calculated from 1 to 3)

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

The country, which attracts more than half of FDI in Latin America, experienced particularly strong growth in inward investment in the renewable energy, electronics, chemicals, and food and beverage sectors. Source: A.T. Kearney FDI Confidence Index 2012



PresenterPresentation NotesThe 2012 A.T. Kearney FDI Confidence Index examines future prospects for FDI flows as the world seeks to recover from the global recession and continued economic uncertainty in Europe and the United States. The Index assesses the impact of political, economic, and regulatory changes on the FDI intentions and preferences of the leaders of top companies around the world.

Brazilian Automotive Market


Source: Anfavea OEM Brazil association


2.7 3.1

3.4 3,6

3.9

4.3

4.7

5.3

5.7

2.9 2.9 3.2

3.4 3.6

4.0 4.3 4.4

4.5

0

1

2

3

4

5

6

2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F

Sales Production

Light vehicles sales in Brazil is expected to increase from 3.4 million units in 2011 to 5.7 million units by 2016.

This is in spite of massive tax burden and high consumer interest rates, which increase effective prices substantially and thus keeps industry volumes below total market potential.

Total Fleet: nearly 37 million vehicles light vehicles and 3 million heavy commercial vehicles plus over 11 million motorcycles significant aftermarket.

Anfavea 2010 Forecasts

Market Competiveness

VW 29%

Fiat 25%

GM 22%

Ford 13%

Renault 1% Others 9%

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


Market- share as of -1998 Market- share as of - 2010


Passenger Cars Market share in Brazil

Fiat 24%

VW 21%

GM 19%

Ford 10%

Renaut-Nissan

6%

Others 20%




Top light vehicle manufacturers: Volkswagen

Group Fiat Group General Motors Ford Motor Renault PSA Group

VW 26.1%

Fiat 24.6%

GM 19.7%

Ford 10.6%

Renault 5.4%

PSA 4.7%

Other 8.9%

2010 Brazilian LV production share



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40

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Global total Brazil India China Russia

Axis

Title

2010 2011 (f) 2012 (f) 2013 (f) 2014 (f) 2015 (f) 2018(f)

Light vehicles sales in million units (20102018f)

Source: JD Power

Geography 2011 growth 2012 growth (f)

CAGR 20102015(f)

Global 4.1% 5.0% 6.5%

Brazil 2.5% 1.1% 8.9%

India 5.2% 12.0% 14.4%

China 4.6% 9.2% 9.9%

Russia 38.2% 2.6% 12.7%

Growth slowed in 2011, however, the long-term growth story intact

Global light vehicle (LV) sales register modest growth in 2011 with the emerging markets cooling down, however, the long-term growth story in emerging markets remains intact

PresenterPresentation NotesThe growth in BRIC markets, except Russia, slowed down in 2011. The Russian market is growing very fast due to the scrappage incentives.The Next Eleven markets, after a double-digit growth in 2010, also saw demand cooling off in 2011. Note: The Next Eleven (or N-11) markets refer to Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam.

The long-term growth story in the emerging markets remains intact.

Issue/trend

Investments announced Investments in the sector are forecasted in US$ 15 billion, between 2009 and 2012.

Companies that are already in the brazilian market represent 80% of this number;

New comers have plans to build plants in Brazil, such as Hyundai and Chery;

Companies established in the country are planning to expand its current operations Volkswagen is planning to increase its production capacity to 1 million vehicles by 2012, and GM is planning US$ 1 billion investment in its Gravata Plant, not to mention new GM and Fiat investments in the Northeast (Pernambuco) and several other projects currently under negotiation with multiple states;

PSA Peugeot Citroen, Honda and Toyota also announced major investments in the country in upcoming years;

Brazil has an strong established base for product development and engineering;

Automotive Market Investments


Automotive Market Challenges


Rising costs of raw materials (steel) X importation

Difficulties in obtaining skilled

labor (Engineering)

Increased local and global

competition New players

Increased consumer demanding -

technological demands x Decreasing

prices

New regulations (air bags)

Increase in imports of vehicles,

IPI Tax versus

Automotive Regime

Growth of sectors linked to the

production of trucks, tractors and

machinery

Low investment in

local R&D versus Technology

Innovation incentives and

Automotive Regime

Development of alternative energy

sources PCH captive power

plants

Significant investments for

expansion

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

Quality problems that come from Tier 2 and 3 plus suppliers bottlenecks

Automotive Industry Scenario

Not an OECD member Taxes imposed at the federal, state and municipal levels Complex indirect tax system: multiple federal state and local taxes apply to the same

transactions, tax-on-tax with massive impacts on pricing, cash flows, and profitability Guerra fiscal (harmful tax competition) between states (27) and municipalities

(over 5.000) to attract investments Lack of harmonization creates significant tax inefficiencies

Tax incentives available to attract or retain investments, and/or to protect local industry

Taxation of income on a worldwide basis with severe look-through mechanism and with foreign tax credits available (general limitation) at the end of each calendar year

No corporate income tax consolidation mechanism available in Brazil Brazilian tax system complexity and frequent changes requires constant monitoring of

both amendment in tax law and new interpretation It is not rare that the tax authorities take unreasonable positions and that taxpayers

may need to litigate/or discuss administratively Administrative jurisprudence trend of adopting a substance over form approach

Tax Environment Overview


Corporate Income Tax (IRPJ) and Social Contribution Tax on Profits (CSLL) Combined corporate income taxes rate - 34%

Net operating losses (NOLs) may be carried forward indefinitely for corporate tax purposes, offsetting is limited to max 30% of annual net taxable income (no carryback)

Significant Relief Mechanisms: Regional Deferral Incentive (North and Northeast), Interest on Equity, Export Financing, Technology Innovation incentives, etc.

Gross Revenue Contributions (PIS and COFINS) Applicable under a non-cumulative VAT-like regime (default) or under a cumulative regime. General rule: combined

rate under non-cumulative regime is 9.25% with credits available on certain inputs to offset against PIS and COFINS due (under the general cumulative regime, the combined rate is of 3.65% with no credits available).

On the gross consideration for sale of goods/taxable services

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

State VAT (ICMS) generally levied on the physical movement of goods, including their imports. It also applies to certain services (e.g.

telecommunication services and transport). Interstate transactions rates: 7% for North, North-east or Middle-west regions or Esprito Santo or 12% for South or South-east regions Intrastate or import transactions rates: 17% or 18% depending on the State.

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

Tax Environment Overview: main corporate taxes



The Brazilian government actions

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

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

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

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



The plan's objective is to stimulate the industry, which must accompany the growth of domestic demand and the level of consumer demand in Brazil. To this end, measures were announced in eight areas: foreign exchange, taxation, credit, stimulating the production with an increase in government procurement, export promotion, trade defense actions in the sector of communication and information and new automotive regime. PAYROLL tax reduction There will be exemption of 20% contribution to the National Social Security Institute (INSS) on the payroll. In exchange, the companies collect a new tax of 1% to 2.5% of revenue domestic sales for manufacturers of automotive components, will be 1%.



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

IPI Tax

To qualify for the scheme, companies first need to meet at least three of four requirements to receive government incentives, ranging from the elimination of 30 additional points to the IPI extra discount of 2 points in the normal rate. The first requirement is to invest at least 0.15% of gross revenue obtained in the country in research, technological development and innovation. This percentage rises to 0.5% from 2017. The second condition is to invest a further 0.5% of gross sales in engineering and basic industrial technology - a percentage that rises to 1% from 2017.



The third measure is to obtain the qualification meet in Brazil at least 8 of 12 stages of production of light vehicles and 10 of a total of 14 cases in the case of heavy vehicles. By 2017 this figure rises to 10 of 12 steps in the production of light and 12 of the 14 heavy. The fourth requirement of the new automotive regime concerns the efficiency of the models produced in the country from next year, automakers will need to register at least 60% of car models manufactured in the labeling done by Inmetro. This index will reach 100% in 2017. Nationalization and incentives After registration under the new regime, fulfilling three of the four requirements above, IPI will get discounts at companies that buy in Brazil and Mercosur vehicle parts and supplies, with minimum rate to be stated in the decree to be published. The reduction of 30 percentage points (pp) IPI is calculated based on the value of purchases of parts and materials in the country The larger the purchase, the greater the discount, up to 30 percentage points. There will be additional reduction of up to 2 percentage points in the IPI for companies that meet the goals of investment in R & D (0.15% of gross sales) and engineering (0.5% of revenues).

E&Y and the Industry

Issue/trend

Ernst & Youngs Global Automotive Center


E&Y Global Automotive Center

Our Global Automotive Center is focused on the key business issues in the global automotive industry.

It brings together 7,000 professionals around the globe to help our clients achieve their potential a team with deep technical experience in providing assurance, tax, transaction and advisory services.

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

Most automotive companies are looking to solve two key challenges - improving business performance and cost reduction. This dual objective can deliver significant benefits and position the organization to emerge from the downturn with a stronger, more secure and competitive profile.

Whether the focus is on transforming the business or on sustaining performance and building on achievements, we help our clients improve the performance and effectiveness of their business by examining everything from supply chain management and business processes, to future directions and opportunities for growth.

Presented by: [email protected]

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