Medium Heavy Commercial Vehicles: The other face of the pandemic in Brazil
In early March 2020, Brazil registered first cases of COVID-19 virus whilst Europe and Asia struggled with thousands of cases... The initial measures were introduced, such as social distancing, closure of schools, offices and manufacturers started a new era that Brazil has never seen before. Even though the Brazilian president and governors adapted a different strategy to fight the spread of the COVID-19 virus, the country entered a period of lockdowns, fear and uncertainty. A year later the pandemic is still here. However, the re-opening of the economy and the return of activities in the last quarter of 2020 has brought back the optimism for a quick recovery of the Brazilian economy. This year's truck market looks set for strong growth.
What accounts for the change in direction? Important context is provided by the macro-economic environment. The re-opening of central economies in South America resulted in an increase in demand for raw materials, which lead to a significant surge in commodity prices. and Brazil as a large commodities producer benefited from that. Moreover, the currency devaluation has supported investments in some segments of the economy despite of the devastation that the pandemic has brought. Indeed, in 2021 thanks the devaluation of currency (according to IHS Markit economic data, the Brazilian Real devaluated almost 30% against US dollar), which was a common phenomenon in Latin America's economies during the pandemic period, investments from exporters grew due to currency trade and some segments of the economy, such as agroindustry and agribusiness, performed very well. These segments of the economy use trucks as the main mode of transport to move their goods, hence, truck industry in Brazil has experienced a great performance with an increasing demand for haulage goods. Controversially, the increased demand for trucks to transport raw materials aiming to feed the global supply chain has been hit by a shortage of some basic components, such as plastic components, iron, ore, and semi-conductors.
During the pandemic period, the shortages of some components and interruptions in the industry affected the performance of truck sales in Brazil. Sales of heavy commercial vehicles contracted 11.6% y/y in 2020, despite of a high demand from truck operators. This year, the effects of the pandemic are seen in closures of many businesses and cancelling of important fairs and trade shows. In 2021, the FENATRAN - the largest truck trade show in South America - will go ahead, but on a smaller scale as few OEMs announced that they will do their private launch events instead. The 2019 FENATRAN exhibition generated BRL 8.4 billion in business.
In parallel, the pandemic also accelerated disruptions and change behaviors, even in the logistics sector. The consumption of internet products was boosted during the social distancing and at the same time logistics companies have invested in improvements and efficiency. The increasing pursuit of hubs to rent close to the large cities grew significantly and this was reflected in capital market, which saw the price increase of stocks and REITs. The applicability of trucks also changed, with Class 6 becoming the most required by truck operators in the medium segment (6-15t GVW). During the first half of 2021, demand for Class 6 trucks grew by 48.8% compared with the same period of 2020. In contrast, Class 6 trucks decreased 15.4% year-on-year in 2020although this was the lowest fall among all trucks >6t GVW. On the heavy side (>15t GVW), trucks with specifications focused on agribusiness transport (primarily articulated trucks with engine horsepower of over 420 with axle configuration 6x4 or 8x4) still have a domain and in 2020they represented nearly 20% of Brazil's truck sales, and they were responsible for 22.3% of truck sales in January-June 2021. Demand for vehicles specializing in construction and fractional cargo has increased as well. In parallel, the use of intermodal (combination of truck + cabotage or truck + railroad) to transport grains accelerated during the pandemic, and likely this will be a trend among trucks operators aiming to reduce the transport costs. IHS Markit analysts project that the heavy commercial vehicle market in Brazil will post a substantial recovery in 2021 and it will reach around 126,000 units.
The pandemic brought structural changes in the transport industry in Brazil. The investments that benefited from the currency devaluation, an improvement of profit margins and an increase of efficiency, opened opportunities for improvements in the medium- and long-term in the land transport sector. The increasing global demand for goods combined with the use of new technologies will likely require more efficient way of transport, and trucks will continue to have a huge share in the transportation business, even with an increase of cabotage and use of railways. For both intermodal ways, transport still has a huge dependence of trucks, to haulage from field to port (drydock or port). On the truck side, tighter legislation (emission) for trucks will force new investments in technologies such as alternative propulsion (electrification, hybridization or use of biofuel), hardware to increase transport efficiency, and ways for OEMs to support fleets with additional services. In parallel, the government may accelerate the introduction of new rules and incentives for new technologies and therefore maintain Brazil's importance in the global truck market.