Thematic Report - Chinese Cars in Brazil - The Year of The Dragon

BTG Pactual Affiliate Research
Banco BTG Pactual S.A.

Brazil
Sector Note
Thematic Research | Chinese Cars in Brazil 28 April 2024
Analysts
The Year of the Dragon
Lucas Marquiori
Brazil – Banco BTG Pactual S.A.
2024 is poised to be a pivotal year for Chinese cars in Brazil lucas.marquiori@btgpactual.com
After years of dominance by Western brands, the Brazilian automotive market is +55 11 3383 9119
experiencing a tectonic shift, with the sudden influx of Chinese cars. Superior
affordability and successful brand repositioning have led Brazilians to fall in love with Fernanda Recchia
Chinese cars. This shift is driven by the vastly improved perception of product quality fernanda.recchia@btgpactual.com
and another key driver: the growth of electric vehicles (EVs). We saw this trend taking +55 11 3383 3031
shape during Covid and accelerating in 2023. Now, in 2024, it has become crystal
clear, with Chinese brands representing 5.7% of new vehicle sales in Brazil (BYD + Marcelo Arazi
GWM). From 2024 on, these brands will be too large to ignore and will become a marcelo.arazi@btgpactual.com
stronghold in Brazil’s automotive industry. +55 11 3383 5178
From exporting deflation to becoming local producers

This wave of Chinese vehicles in Brazil relied heavily on imports, mainly EVs. The Chart 1: Share of Chinese OEMs in
Chinese hold some key competitive advantages in manufacturing key elements of new vehicle sales in Brazil
EVs (e.g. batteries), which coupled with their superior scale make their products much
more affordable in many Western markets. With the post-pandemic automotive world
characterized by high car prices, the Chinese found fertile ground to explore their
competitiveness and export deflation to the world, exploring their industrial capacity.
After Brazil´s government reinstated import tax on EVs, the Chinese accelerated
programs to become local producers – key carmakers like BYD and Great Wall
Motors already have manufacturing facilities in Brazil.
Electrification trend gains a powerful ally

Chinese cars are nothing new for Brazilians. But this time, the introduction of EVs at
more affordable prices vs. Western peers is driving rapid growth of Chinese cars in
Brazil. The local government has been pushing for EVs for a while, and the reduction Source: Fenabrave and BTG Pactual
of import tax has given Chinese cars another competitive boost. Brazil still has a long
way to go in electrification, as its charging infrastructure remains small vis-à-vis the
country’s potential. Brazil has better options to speed up decarbonization, such as
Chart 2: Price comparison - Chinese
incentivizing biofuel solutions. That’s why recent government programs like Mover cars (BYD and GWM) vs. its main non-
focus on decarbonization instead of just pure electrification. chinese electric peers
Trying to assess the key consequences for our coverage

The rapid influx of Chinese cars could bring several changes to local automotive
industry dynamics and, thus, to the companies we cover. Indeed, the strong growth of
EVs could offer major opportunities for the Capital Goods companies we cover. We
explore all these opportunities herein, and also highlight the growing charging
infrastructure opportunity for WEG (we estimate electric mobility to represent ~8% of
WEG going forward), and the growing bus fleet electrification opportunity for
Marcopolo (e-buses could mean 7% of POMO). On pricing dynamics, we compiled a
large database of prices to show the preliminary impacts of the fast entry of Chinese
cars (see our price comparison study on page 74). Inevitably, these changing pricing
dynamics will ensure a continued debate on the depreciation rates of car rental
companies (Localiza, Movida).
Source: Fipe and BTG Pactual
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Thematic Research | Chinese Cars in Brazil BTG Pactual Affiliate Research
Sector Note - 28 April 2024 Banco BTG Pactual S.A.
Executive summary
The middle country and the country in the middle
Brazil offers a key market opportunity for the global ambitions of Chinese car
manufacturers. Facing much less political resistance than in mature Western
economies, Chinese vehicles have found fertile ground to grow fast in Brazil,
leveraged by the massively competitive Chinese industry and changes in customer
habits in the Brazilian market. This thematic report aims to explain the key steps in
this industry trend and to assess the key consequences.
Sections 1-4 feature the main data showing the rapid influx of Chinese cars into
Brazil, with the latest figures on Chinese vehicle sales in Brazil and their growing
market share. We also recap the entry of other carmakers into Brazil, including
Chinese automakers´ first forays into the local market.
In sections 5-8, we explain why this latest entry of Chinese manufacturers is bearing
more fruit, due to the attractiveness of Chinese EVs. We compare this trend in Brazil
with other regions, where the Chinese experience has yielded different results. Then,
we shed light on the process of Chinese players becoming local producers instead of
only selling imported cars. We also provide examples of other Chinese investments in
South America.
In sections 9-12, we delve into the electrification trend in Brazil, recapping the
process of EV growth in Brazil. We present the models that have had most success
in Brazil and the debate on the new import tax regime recently implemented by the
government. We also comment on the current state of charging infrastructure in the
country.
In sections 13-15, we explore the different distribution strategies adopted by Chinese

players, mainly versus traditional OEMs. We also comment on the side effects seen
in other markets, such as the overall deflation of vehicle prices, driven by the superior
competitiveness of the Chinese. We also comment on the likely impacts on the
residual value risk of Chinese cars.
In part 2, we did some assessment studies to anticipate the likely risks and
opportunities that the fast growth of Chinese cars could bring for the companies we
cover. We ran exercises on the growing electrification of heavy vehicles and the need
for more charging infrastructure. We also prepared interesting databases to assess
the impacts of the entry of Chinese cars on vehicle pricing in Brazil.
This 94-page report sheds light on the growth of Chinese cars in Brazil and the likely
consequences for the local automotive industry. The pace of such trend may change,
but we believe 2024 will be marked by Chinese brands. The Year of the Dragon.
Hope it helps,
Transportation & Capital Goods Team
Page 3
Table of Content
Part 1 - The rise of Chinese OEMs in Brazil Page 5
1 Section 1. Introduction Page 5
2 Section 2. The anatomy of a market change Page 9
3 Section 3. Recap of OEMs entering the Brazilian market Page 12
4 Section 4. First Chinese ventures in Brazil Page 16
5 Section 5. Specific features of the Chinese success Page 18
6 Section 6. Global benchmarking – what happened in other countries? Page 21
7 Section 7. From importers to producers Page 26
8 Section 8. Other investments in the region Page 31
9 Section 9. A key factor this time: electric vehicles (EVs) Page 33
10 Section 10. A brief review of automotive electrification in Brazil Page 37
11 Section 11. The discussion on import tax Page 40
12 Section 12. A quick look at Brazil’s charging infrastructure Page 42
13 Section 13. Distribution strategy Page 45
14 Section 14. Side-effects – lower prices Page 47
15 Section 15. Residual value risk management Page 51
16 Section 16. Forecasting Chinese EV growth in Brazil Page 55
17 Section 17. Is electrification really the best solution? Page 57
Part 2 – Read across for our coverage Page 60
1 Capital Goods Page 61
1 WEG Page 61
2 Iochpe-Maxion Page 67
3 Randoncorp & Frasle Mobility Page 67
4 Tupy Page 69
5 Marcopolo Page 70
2 Transportation Page 72
1 Car rentals (Localiza&Co and Movida) Page 72
2 Machine rental companies (Armac, Mills and Vamos) Page 85
3 Tegma Page 87
4 Simpar Page 88
5 JSL Page 89
6 Wilson Sons Page 90
Page 4
Part 1 - The rise of Chinese OEMs in Brazil
Section 1. Introduction
Chinese cars in Brazil: A new chapter in auto industry dynamics
The Brazilian automotive industry has undergone a significant transformation in
recent years due to the entry of Chinese original equipment manufacturers (OEMs). The arrival of Chinese automakers has
Previously dominated by established global giants, this shift has reshaped the boosted competition and innovation and
industry and consumer preferences. The arrival of Chinese automakers has boosted refreshed dynamics in Brazil. Companies
competition and innovation and refreshed dynamics in one of South America's largest such as BYD, Chery, and Great Wall Motor
auto markets. China, known as the world’s largest auto market, has been expanding Company have made significant strides in
its reach globally. Brazil, with its sizable population and growing middle class, penetrating the Brazilian market.
presents an attractive opportunity for Chinese car manufacturers seeking to expand
their international footprints. Companies such as BYD, Chery, and Great Wall Motor
Company have made significant strides in penetrating the Brazilian market.
A new contender emerges

Despite still representing a small fraction of Brazil’s vehicle fleet, imports of Chinese
EVs spiked in 2023 and should increase further in 2024. Local industry data reveals
that Chinese brands represented only 0.4% of EV imports in 2021, jumping to 8% in
2022 and 35% in 2023. This fast growth shows that Chinese vehicles are set to
become a fixture in the Brazilian auto market.
Chart 3: Share of Chinese Imports in Brazil's Electric Car Market
Source: ANFAVEA and BTG Pactual
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Driving forces
Several factors have helped Chinese cars gain traction in Brazil: (i) cost-effective:
Chinese automakers are renowned for offering vehicles at competitive prices, and
affordability plays a crucial role in consumer decision-making in a price-sensitive
market like Brazil; (ii) technological advancement: Chinese manufacturers
have made huge investments in R&D, resulting in technologically advanced vehicles
equipped with features that appeal to modern consumers, including electric and
hybrid vehicles, aligning well with Brazil's growing environmental agenda; (iii)
strategic partnerships: agreements with Brazilian companies have facilitated the
entry of Chinese automakers into the local market, leveraging local expertise and
resources to help them navigate regulatory complexities and tailor their offerings to
suit Brazilian preferences; and (iv) expanding product portfolios: Chinese
carmakers have diversified their product offerings to include sedans, SUVs, and EVs,
boosting competition and providing Brazilian consumers with a broader range of
choices.
Figure 1: Chinese vehicle portfolio in Brazil (main vehicles)
Source: Fenabrave and BTG Pactual
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Challenges and opportunities

The entry of Chinese cars brings a slew of opportunities and challenges for global
automakers, such as: (a) brand perception: overcoming skepticism regarding the
quality and reliability of Chinese vehicles remains a significant hurdle, so establishing
a positive brand image via effective marketing and aftersales service is essential to
building consumer trust; (b) competition: established players in the Brazilian
automotive market face stronger competition from Chinese newcomers, forcing them
to innovate, improve product offerings, and enhance customer experience to maintain
market share; (c) regulatory compliance: adhering to Brazilian regulations and
standards, particularly regarding safety and emissions, is imperative for Chinese
manufacturers to gain acceptance in the market; and (d) going local: investing in
local manufacturing and supply chains can enhance cost efficiency and mitigate risks
associated with currency fluctuations and trade barriers.
Figure 2: Main challenges faced by Chinese OEMs in Brazil
Source: BTG Pactual
Shaping the future of mobility

The influx of Chinese cars in Brazil signals a broader shift in the global automotive
industry. As emerging markets like Brazil continue to gain prominence, Chinese
manufacturers are poised to play a pivotal role in shaping the future of mobility. Their
emphasis on affordability, innovation, and sustainability aligns with evolving
consumer preferences and global regulatory trends. In Brazil specifically, the entry of
Chinese cars marks a major milestone in the country's automotive industry. Although
challenges persist, the opportunities for growth and innovation are immense. By
embracing technological advancements, fostering strategic partnerships, and
prioritizing consumer needs, Chinese automakers are poised to become a fixture in
Brazil's automotive landscape, driving a more dynamic and competitive market.
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Figure 3: Main advantages of Chinese OEMs in Brazil
Source: BTG Pactual
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Section 2. The anatomy of a market change

In this section, we provide some key numbers highlighting the growth of Chinese
vehicles in Brazil, leveraging data from ANFAVEA (Brazil’s carmaker association)
and other associations and news outlets to briefly summarize Chinese players’ entry
into the country.
Chart 4: Vehicle imports in Brazil, by country of origin
According to official data, almost half of all electric cars imported by Brazil in 2023
originated from China. Brazil boasts the largest car market in LatAm by a significant
margin—more than 3x larger than #2 Mexico. In 2023, over 2mn cars were sold in
Brazil, with traditional combustion engine vehicles accounting for over 75%,
underscoring the substantial growth potential for EVs in the country.
Chart 5: Historical evolution of the share of imported vehicles
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Brazil doesn’t produce passenger EVs domestically and only started importing such
vehicles in 2017. Just two years later, imports were growing fast, with EV sales
reaching 99k LTM24 – with over 63% manufactured by Chinese companies.
Chart 6: Historical evolution of sales of imported vehicles ('000 units)
Chinese automotive behemoth BYD, the world's largest EV manufacturer, plans to

initiate production of hybrid and fully electric vehicles in Brazil as early as this year.
The company acquired Ford’s former industrial park in Camaçari, Bahia, which is part
of a complex that includes lithium and iron phosphate processing (for batteries) and
chassis production for electric buses and trucks.
Chart 7: Sales of new energy vehicles by type of technology in Brazil (units)
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Going forward, the expansion of EV sales in Brazil faces two major hurdles: cost and
infrastructure, both of which Chinese companies are addressing. The BYD Dolphin,
priced at just US$16,300, will be among the first models to roll off the assembly line at
its Brazilian plant. Additionally, fellow Chinese car manufacturer GWM, besides also
manufacturing cars in the country, intends to roll out 100 charging stations around
São Paulo, primarily powered by solar energy.
Chart 8: Share of EVs in total light vehicle market in Brazil
A few highlights:
EV sales: Hybrid and electric vehicles reached a record 7.9% of domestic

passenger vehicle sales in January 2024, driven by tax breaks until YE23.
Imported vehicles: In January 2024, nearly 20% of all vehicles sold in Brazil
were imported, the highest print in over a decade, with China accounting for 25%.
Electric vehicles represented approximately 14% of imported cars.
Table 1: OEMs' market share in automotive sales in Brazil
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Section 3. Recap of OEMs entering the Brazilian market

In this section, we comment on the historical trend of car manufacturers entering the
Brazilian market. Given its sizable domestic car market, Brazil has always captured
the attention of large global OEMs. We believe this is also what drove Chinese
players into the local market.
Brazil has historically been a highly competitive automotive market, with its low
vehicle penetration and large population consistently attracting OEMs to the country.
In recent years, Brazil has experienced a surge in new carmakers striving to capture
a share of its lucrative automotive market. These newcomers have pursued
aggressive strategies to gain market share amid a landscape historically dominated
by established global players. Below, we present a timeline of Brazil’s automotive
industry and the changing OEM mix in the country.
Figure 4: Brazilian automotive public policies and the entry of new automakers or installation of new industrial units
Source: Revista Produção Online, Florianópolis, SC, v23, n. 2 and BTG Pactual
Since 1956, public policy has spurred the entry of new automakers into the Brazilian
market and/or the establishment of new industrial facilities by automakers already
operating in the country. More recently, the Brazilian government launched a new
automotive industry program named “Mover” to foster sustainable motorization. This
new policy should support the growth of Chinese players.
Federal government launched a new automotive program called Mover

At the close of 2023, the federal government published Provisional Measure
#1,205, creating a new automotive program named Mover (Portuguese acronym
for Green Mobility). The program sets new sustainability requirements for the
local automotive industry while aiming to spur the production of new mobility and
logistics technologies, expanding on the former automotive program known as
Rota 2030. Brazil has a long track record of automotive programs that have
evolved to incorporate new sector demands. The new program should support
the country’s decarbonization targets while reinforcing the growing electrification
trend.
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Mover: A brief snapshot

The new automotive program was developed by the Ministry of Industry,
Commerce, and Services (MDIC), aiming to stimulate investments in energy
efficiency, set minimum waste management targets for vehicle production, and
reduce the tax burden on less polluting producers. The program is set to offer Announced OEM investments since the
R$19bn in tax credits over five years (starting with R$3.5bn in 2024, compared to launch of Mover Program
an average of R$1.7bn per year during the former Rota 2030 program). Mover
retains its predecessor’s LT goal of reducing carbon emissions by 50% by 2030
while advancing significantly in the definition of how carbon footprints are
measured and extending the program to other mobility sectors.
From “well to wheel”

One of the key features of the new program is the stricter sustainability
requirements. The government will measure carbon footprints per model,
including a "well to wheel" calculation, meaning the entire energy cycle used in
vehicle manufacturing (unlike the former Rota 2030 program, which only
measured "tank to wheel"). For instance, in the case of ethanol, the carbon
footprint will be tracked from sugarcane sowing onward (similar measurements
will apply to all other propulsion systems, such as batteries, gasoline, and
biofuels). Starting in 2027, the carbon footprint measurement will expand from
vehicle and component manufacturing to include scrapping.
Additional features
Among the main changes promoted by the program, we highlight: (i) expands
scope from auto-only to all sustainable logistics and mobility sectors; (ii)
significant evolution in carbon footprint measurement to include all aspects of
vehicle manufacturing and eventually vehicle scrapping; (iii) implementation of a
green tax that will reward/penalize companies based on their chosen propulsion
system, energy efficiency, sustainability, etc.; (iv) increase in R&D investment
requirements from 0.3% to 0.3-0.6% of sales, resulting in higher tax credit
generation (from R$0.12 per invested BRL to R$0.5-3.2); and (v) spurs the
opening of new manufacturing plants in Brazil via tax credits equivalent to import
tariffs for companies transferring plants to the country.
Assessing the most common market strategies among newcomers

To gain traction in Brazil's fiercely competitive automotive market, new entrants have
deployed a range of somewhat aggressive strategies, including:
Price war: Intense price competition has driven down vehicle prices, benefiting
consumers but squeezing profit margins for manufacturers.
Promotional campaigns: Aggressive marketing campaigns, including discounts,

incentives, and promotional events, have been employed to attract attention and
stimulate sales.
Expansion initiatives: Investments in dealership networks, service centers,

and aftermarket support have expanded market reach and enhanced brand visibility.
Innovative financing options: Flexible financing and leasing models have

made purchasing vehicles more accessible to a broader segment of the population.
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Chart 9: Automotive OEMs’ market share evolution (light vehicles)
Chart 10: Chinese OEMs’ market share evolution (light vehicles)
The case of Chinese manufacturers

Recently, Chinese car manufacturers have emerged as formidable contenders in the
Brazilian market, leveraging their cost-effective production capabilities and ambitious
expansion plans. Brands like BYD, Geely, Chery, and Great Wall Motors have been
particularly aggressive in their market penetration efforts. Their strategies replicate
those of other OEM newcomers listed above but with a few particularities, such as:
Affordability: Chinese automakers offer vehicles at competitive price points,

appealing to cost-conscious Brazilian consumers.
Diverse product range: From compact cars to SUVs and electric vehicles, Chinese
manufacturers have diversified their product offerings to cater to various market
segments.
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Strategic partnerships: Collaborations with local Brazilian companies have

facilitated market entry and streamlined distribution channels.
Startups and niche players: Beyond traditional automotive giants, startups and
niche players have entered the Brazilian market with innovative approaches and
disruptive technologies. The stimulus for a more systematic change in the automotive
ecosystem is positive for Chinese manufacturers, as it reduces the resistance to
foreign players and helps prepare the customer base for more tech-driven solutions.
Among the new tech-oriented players gaining space in Brazil, we highlight the
following niches:
Eco-friendly solutions: Startups specializing in EVs and sustainable mobility

solutions have garnered attention in Brazil's environmentally conscious market.
Digital disruption: Niche players leveraging digital platforms and subscription-based

models are challenging conventional dealership networks and reshaping the car-
buying experience.
Figure 5: Digital disruptions cases in the Brazilian automotive industry
Source: Company and BTG Pactual
Targeted marketing: By identifying niche segments and catering to specific

consumer needs, these newcomers aim to carve out their own space in the
competitive landscape.
The automotive industry is inherently competitive

The influx of new carmakers in Brazil has injected dynamism and competition,
offering consumers more choices and driving innovation. However, the battle for
market share remains fierce, with incumbents and newcomers alike vying for the
attention of Brazilian car buyers. As competition intensifies, only those able to adapt,
innovate, and meet evolving consumer demands will emerge victorious in this high-
stakes race for dominance. In such an environment, Chinese OEMs can thrive
via increased product acceptance and more affordable prices, quickly capturing a
larger share of the local market.
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Section 4. First Chinese ventures in Brazil

In this section, we look back at the first forays of Chinese manufacturers into the local
market. We recall that hyped names like BYD and GWM were not the first producers
to try their luck in Brazil.
The first Chinese-made vehicles entered Brazil in 2006, while Effa Motors, Chery,
and CNAuto (a holding company for Chinese brands Hafei and Jinbei) began
importing cars and small trucks into the country in 2008 and 2009. This was followed
by the arrival of JAC (2011), a carmaker that quickly gained around 1% market share,
selling approximately 30k cars in its first year in the country.
To date, Chinese cars have mainly been built in China or assembled from knockdown
kits in Uruguay, then shipped to Brazil. However, under pressure to reduce lead times
and avoid a 30% tax hike targeting import from outside the Mercosur trade block,
these Chinese carmakers are transitioning towards local production. JAC and Chery
have both set up local factories—JAC via a 50-50 JV with SHC, while Chery
established a direct Brazilian subsidiary. Effa and CNAuto also plan to set up
production in Brazil.
Image 1: Chery’s new manufacturing plant in Brazil, after production deal

with CAOA
Source: Exame and BTG Pactual
These investments and new players are expected to drive increased demand for
supply chain and logistics services in Brazil. Local media have reported that two new
Chinese electric car brands—Omoda and Jaecoo, belonging to Chery
International—will enter Brazil in the coming year via a JV, launching three models.
Although pricing has yet to be disclosed, it is expected to be competitive. In 2024 and
early 2025, GWM’s factory in Iracemópolis, São Paulo, and BYD’s facility in
Camaçari, Bahia, are set to begin production of their first EVs in the country.
This year, the proportion of imported vehicles from China is expected to reach 35%,
meaning one-third of the country’s EVs will be purchased from Chinese
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manufacturers. With the start of domestic production by BYD and GWM, the impact
will be even more significant.
Challenges for Chinese OEMs entering new markets

Despite promising prospects and ambitious goals, Chinese OEMs still face
challenges in globalizing their operations. According to Deloitte, inadequate supply
systems, lack of fundamental capabilities, insufficient local market resources, limited
brand advantages, and product and technology drawbacks are common pain points
for Chinese OEMs, hindering their international expansion. To win on a global playing
field, OEMs must clarify their goals, adopt the right market strategies, give full play to
their strengths, and try to fill capability gaps quickly.
Figure 6: Globalization challenges for Chinese OEMs
Source: Research conducted by Deloitte in 2022 and BTG Pactual
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Section 5. Specific features of the Chinese success

In this section, we dig into the key factors contributing to the success of recent
Chinese endeavors in the local auto market. OEMs like BYD and GWM have quickly
gained share in the country, surpassing their Chinese peers who entered Brazil much
earlier, so we believe several elements are driving their success.
Turning the tide: factors contributing to success

There are encouraging signs for new Chinese players entering the local market, with
key factors propelling their success. According to GfK, these include: (i) insights from
other sectors; (ii) improved alignment between design and consumer needs; (iii)
affordable EV offerings; (iv) advanced tech integration; and (v) strong safety ratings.
Insights from other sectors: The rise of Chinese tech giants provides automakers
with a blueprint for market entry and expansion. The rapid acceptance of Chinese
brands in other sectors, such as social media and consumer technology and
durables, suggests changing perceptions.
Figure 7: Chinese technology producers have gained market share in key subsegments but still rely on global value
chains for inputs
Source: Study prepared by McKinsey in 2019, based on 2018 or the latest available info. BTG Pactual
Design and consumer need alignment: Recent models cater more effectively to
European tastes and requirements, demonstrating a growing understanding of local
consumers. Research indicates that Chinese vehicles are positively received when
consumers are unaware of their origin. In fact, many even mistake them for German
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cars, a preferred country of origin.
Consumer opinions about Chinese vehicles, such as concerns about design and
quality, dissipate when evaluated in blind tests. This reveals that Chinese automakers
closely match European design preferences and that consumer opinions are
influenced more by perceptions of China as a nation-state than by actual
misalignment with consumer needs.
The EV advantage: China's leadership in EVs, particularly in providing affordable

options with innovative solutions like replaceable batteries, positions it ahead of the
game as environmentally conscious consumers seek greener alternatives. While
47% of consumers prefer electric, hybrid, or hybrid plug-in vehicles for their next
purchase, 87% would not buy one.
Established brands miss an opportunity to convert a significant portion of consumers

considering EVs due to high prices and limited driving range. Chinese brands can
address these barriers by offering cheaper EV models with replaceable batteries,
extending driving range, and making charging more efficient.
Chart 11: China’s share of global electric passenger car production, sales, export, and EV battery production
Source: The International Council on Clean Transportation and BTG Pactual
Technology integration: Chinese brands embed state-of-the-art technology in their

vehicles, enhancing their image, user experience, and safety. However, consumer
perception remains a significant hurdle, with only 11% believing Chinese cars are
technologically advanced compared to their German (34%) and Japanese (23%)
counterparts.
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Breaking the quality/safety paradigm: Safety ratings are crucial in earning and
maintaining consumer trust. Chinese brands often exceed expectations in this area,
with some even securing coveted 5-star safety ratings. These achievements
challenge preconceptions about Chinese manufacturing quality and demonstrate a
commitment to consumers’ well-being.
Table 2: Falling battery materials costs to sustain growth
Source: The Oxford Institute for Energy Studies and BTG Pactual
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Section 6. Global benchmarking – what happened in

other countries?
In this section, we shed light on the entry of Chinese OEMs into other markets.
Chinese cars’ rapid market share growth isn't limited to Brazil: it's a global
phenomenon. Chinese auto brands are gaining traction in major markets like the US
and Europe, but their growth trajectories are very different in these regions. Below,
we discuss recent developments regarding the entry of Chinese cars into these
markets, what worked well in Europe, and what didn’t fly in the US.
A) Europe – A success story

Delayed by the pandemic, Chinese OEMs have expedited their plans to re-enter the
European market following a setback in 2017. Despite past challenges, they've
learned from experience and now boast an appealing brand strategy tailored to non-
Chinese consumers. However, they still encounter historical biases: the 'Made in
China' label is often associated with subpar quality, and China's political standing
compounds this challenge.
According to the Automotive Market Research Institute, due to the significant

increase in sales, the market share of Chinese brands in Europe is growing, led by
MG, whose share doubled to 1.6% as of 1H23. Considering manufacturers
associated with Chinese owners, such as Volvo, the combined market share of
Chinese brands in Europe jumps to 5%.
Before going any further, it is worth explaining what "Chinese brand" actually means
today. These are not just cars designed and produced directly in China: Volvo, once
a classic Swedish brand, has been owned by Geely since 2010, Smart is also now
part of a JV between Mercedes and Geely, and MG cars, despite having British
nameplates, are entirely designed in China. As such, the indirect influence of the
Chinese auto industry on Europe is much greater than it might seem.
Table 3: EU new car imports, main countries of origin
Source: Eurostate, ACEA and BTG Pactual
The share of Chinese brands increased by 80% y/y in 2H23 alone, putting their
consolidated market share at 2.2%. If you add Volvo, Polestar, and Smart, it rises to
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4.8%. That is, approximately one in every 20 new cars in Europe have Chinese roots,
the highest level ever in the EU. This share is also set to grow, backed by the release
of new models designed specifically for the European market.
MG is the leading Chinese brand in Europe, with its market share doubling to 1.6% in
1H23, overtaking powerful competitors like Mazda, MINI, Suzuki, and CUPRA, and
now ranking among the 20 best-selling brands on the continent. Great Britain has
played a vital role in this success, accounting for almost 40% of total sales. For
Chinese brands, this sales concentration in one country is not a unique phenomenon:
Lynk & Co, DR Automobiles, and EVO also boast significant sales concentration in
certain markets, especially in the Netherlands and Italy.
As experts predicted, EVs have been the driving force behind the expansion of
Chinese brands in the EU. Lynk & Co is a major player in the plug-in hybrid segment,
and MG focuses mainly on classic electric vehicles (BEVs).
In general, Chinese brands are strategically focusing on compact cars in Europe,

including hatchbacks and SUVs, rather than competing in smaller car segments that
are still largely dominated by European manufacturers. Despite the significant
demand for economy cars in Europe, Chinese brands have not yet tested this
segment due to profitability differences and model availability. It is also worth noting
that brands like Nio, Ora, and Hongqi are focused on the premium segment.
Understanding the success of Chinese brands in Europe

Initial attempts by Chinese automakers to penetrate the European market faced
numerous setbacks. Insights from consulting firm GfK shed light on the reasons
behind these challenges.
Cultural bias: The 'Made in China' label has long been associated with low quality
and affordability rather than luxury. This perception persists, especially in relevant
product categories like automobiles. A considerable 42% of surveyed consumers
identified China as their least-preferred country of origin for their next vehicle,
surpassing the second-to-last choice, South Korea, by 25p.p.
Chart 12: Main concerns of Europeans related to Chinese cars
Source: Research conducted by GfK Consulting and BTG Pactual
However, not all consumers hold these views. Younger demographics, in particular,
exhibit greater openness toward Chinese brands, with 18-29 year-olds less frequently
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citing China as their least preferred country of origin.
Consumer reservations primarily stem from broader perceptions about China, with
70% of surveyed consumers citing at least one non-car-related reason for avoiding
Chinese vehicles. This, coupled with negative connotations associated with the
'Made in China' label, leads to assumptions of low quality and a lack of reliability
and/or safety.
Misinformation: Many consumers lack accurate information about Chinese car

brands. While a small portion (15%) associate Chinese brands with electric vehicles
and cutting-edge technology, the majority are confused, associating Chinese vehicles
with models from Japan, South Korea, and France. Additionally, they often perceive
Chinese vehicles as low-quality (45%) and low-priced (43%), with only a minority
considering them technologically advanced (11%) or high-quality, comfortable, and
prestigious (2%).
Widespread skepticism toward Chinese products and a lack of information reinforce

negative assumptions about Chinese vehicles. To succeed, Chinese brands must
dispel these misconceptions and emphasize their 5-star safety ratings, reliability, and
comparable quality to established European brands. They also need to separate
themselves from the perceived reputation of China as a nation.
Consumer loyalty: Europe's rich automotive heritage has bred generations of brand-
loyal consumers. Switching to an unfamiliar brand, especially when it comes to such
a significant investment as a vehicle, poses a challenge for many. China's negative
reputation and the belief that its products are of low quality further deter European
consumers from considering Chinese options. In fact, 51% of surveyed consumers
stated they would never buy a Chinese vehicle.
Moreover, 70% expressed loyalty to their current dealership, highlighting the

importance of after-sales service and personal relationships. However, younger
generations show differing attitudes toward the importance of dealership
relationships.
Concerns about after-sales support: The perception of an underdeveloped

dealership network exacerbates consumer uncertainty regarding the quality of after-
sales service, presenting a logistical challenge for Chinese market entrants.
Misinformation is prevalent regarding Chinese brands: consumers often believe their
model options are more limited than they actually are.
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Chart 13: What is important when buying a car?
Source: Research conducted by GfK Consulting and BTG Pactual
Dealerships remain the primary source of information for potential new vehicle
purchases, with 54% of surveyed consumers citing them as their main channel.
Additionally, 20% of respondents indicated that a lack of dealerships prevented them
from seriously considering Chinese brands. Leveraging digital services and support
can help Chinese brands build a reputation for after-sales excellence while they
expand their dealership networks.
B) United States – political noise spurs backlash

For decades, Chinese auto companies have said they will begin selling vehicles in
the US under their own brands, but none have succeeded, according to CNBC.
That’s not to say that China doesn’t compete in the US market. Aside from major
supply chain ties, there are also a handful of auto brands owned by Chinese
companies operating in the US, such as Lotus, Volvo (including its Polestar spin-off),
and niche EV maker Karma.
American companies, such as GM and Ford, already, or plan to, manufacture some
vehicles in China to be imported and sold in the US. GM imports its Buick Envision
from China to the US, while Ford said last year that it would import its forthcoming
Lincoln Nautilus crossover from the country. But as of yet, a US driver can’t easily
buy a Dongfeng, BYD, or other Chinese-made vehicle stateside.
Aside from potential regulatory hurdles and protectionism, some believe Chinese
automakers could find success in expanding to the US the same way Japan’s Toyota
Motor Corporation and South Korea’s Hyundai Motor Company have done. Those
automakers made their entrances into the US market with affordable, accessible
vehicles, then expanded their offerings to boost quality and safety before ultimately
launching higher-end models.
When the Inflation Reduction Act became law in 2022, its environmental protocols
included strict local sourcing and manufacturing requirements, placing imported
electric vehicles at a significant disadvantage. They did not qualify for tax credits that
could reduce an EV’s sticker price by as much as US$7,500.
Additionally, the Biden administration has not overturned the tariffs imposed on
Chinese products by the Trump administration, which add an extra 25% to the
existing 2.5% import tariff. IRA tax incentives are set to continue until 2030, and
depending on the political climate at that time, they could be extended further.
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Table 4: The top 15 best-selling cars in the US in 2023 had no Chinese model
Source: Motor1 and BTG Pactual
Mexican policy has increasingly favored Chinese imports to combat the effects of
inflation. According to AFS, Chinese brands entered the Mexican market in 2017.
Vehicles manufactured in China, mainly sold under the Chevrolet, Dodge, and Ford
brands, now hold 18.5% market share, with Chinese brands experiencing rapid
growth. In just three years on the market, SAIC’s MG has captured 4.1% of the
market with models like the MG5, MG GT, and MG ZS. Privately held Chery
launched this year and secured 3% of the market with crossover models like the
Omoda 5, Tiggo 4, and Tiggo 7.
Consequently, the US has launched an investigation into whether Chinese vehicle

imports pose national security risks and could impose restrictions due to concerns
about "connected" car technology, as announced by the White House in early March.
The US Commerce Department's probe is essential because vehicles "collect large
amounts of sensitive data on their drivers and passengers and regularly use their
cameras and sensors to record detailed information on US infrastructure", as stated
by the White House. The investigation will also examine autonomous vehicles, as
they could potentially be piloted or disabled remotely.
President Joe Biden expressed concerns about China flooding the US market with
vehicles, which could pose national security risks. White House officials informed
reporters that it was premature to speculate on potential actions, and no decision had
been made regarding a possible ban or restrictions on connected Chinese vehicles.
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Section 7. From importers to producers

In this section, we comment on the decision of some large Chinese OEMs to become
local producers. Inevitably, as they grow their share in the local market, there is a
need for these players to produce vehicles domestically to gain competitiveness and
reduce lead times, besides strengthening local brand recognition.
Chinese brands going global

Chinese automakers seeking global growth are setting up production facilities in
overseas markets as foreign regulators mull imposing measures against Chinese-
made electric car imports. Chery is in talks with the Italian government about
manufacturing in the country. If successful, Chery would be among the first Chinese
automakers with a European manufacturing presence. The growing influence of
Chinese car exports has been causing friction with the US and Europe. Below, we list
a few of the main capacity investments of Chinese automakers outside China:
Chart 14: Key drivers of Chinese automotive OEM globalization
Source: Research conducted by Deloitte in 2022 and BTG Pactual
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BYD
The world's largest EV maker is building production factories in Thailand, Brazil,
Hungary, and Uzbekistan.
BYD started production at its Uzbekistan plant in January with a Song Plus hybrid
crossover. The factory has planned annual production capacity of 300k vehicles.
Under a partnership with Thai industrial developer WHA Group, BYD will produce
150k EVs annually in Thailand, with its local plant expected to start operations later
this year.
BYD’s manufacturing complex in Brazil is expected to start operations by YE24 or

early 2025, with estimated annual production capacity of 150k units in the initial
phase.
BYD announced in December that its Hungarian plant will start producing EVs and
plug-in hybrids, saying it would create thousands of local jobs, boost the local
economy, and support local supply chains. It didn't say when production was slated
to start.
BYD also said it is looking for a location in Mexico for a factory with annual production
capacity of 150k vehicles solely for local sales.
BYD has annual production capacity of 4mn cars in China. Its biggest overseas
markets in 2023 were Thailand, Brazil, Israel, and Australia.
Chery
Chery Auto, China's largest automaker by export volume, said last year that it would
invest US$400mn to set up a factory in Argentina to produce 100k cars annually by
2030.
The company sold more than half of its cars outside of China in 2023, the majority
with gasoline engines. Russia is its largest overseas market, but it also has a
significant presence in LatAm.
In 2014, it set up a plant in Brazil with annual capacity of 150k units.
The Financial Times has reported that Chery is considering building a car factory in
the UK this decade.
SAIC Motors
State-owned SAIC, China's second-largest auto exporter with its MG-branded cars, is
looking for a site in Europe to set up a plant for EV production.
SAIC has built three overseas car plants in Thailand, Indonesia, and India. It also has
a completely knocked down (CKD) assembly plant in Pakistan.
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Great Wall Motor Company

Great Wall Motor Company has a factory in Thailand with annual capacity of 80k
units.
It has also announced plans to build local manufacturing capacity in Brazil, which we
explore below.
Geely
Geely, whose brands include Lotus and Volvo, has factories in Belarus, the UK, and
Indonesia.
Table 5: Trends of major Chinese automotive companies' overseas expansion
Source: SMBC and BTG Pactual
The localization challenge

Each market boasts unique preferences, so localization is a significant challenge for
Chinese auto companies. For example, by embracing brand strategies tailored to
non-Chinese vehicle buyers, Chinese brands like Aiways, BYD, and NIO have
achieved remarkable success in the European market via localization.
To thrive in the Brazilian market, new entrants in the electric vehicle (EV) segment
must prioritize several key factors:
Vehicle safety: Adherence to local safety standards is paramount. This is particularly

crucial for Chinese Original Equipment Manufacturers (OEMs) due to the negative
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connotations associated with the "Made in China" label.
Design: Offering vehicles with regional design elements that resemble popular
models from established brands can enhance appeal.
Usership business models: Developing mobility-as-a-service or subscription

models and/or establishing partnerships with rental agencies and companies catering
to consumers who prefer usage/sharing options over EV ownership.
Partnerships: While ecommerce remains relatively insignificant for new vehicles,

collaborating with importers and established dealership networks is essential to
capturing consumers at various touchpoints along their purchase journeys.
Addressing this localization challenge and implementing strategic planning has

prompted Chinese newcomers to expedite their plans to establish local production
capabilities. Two prominent new Chinese OEMs, BYD and GWM, have already
unveiled localization strategies, which we briefly outline below.
A) Great Wall Motor Company

Chinese automaker GWM to commence production in Brazil in May 2024
GWM plans to install local manufacturing capacity in Brazil. According to local media,
the Chinese OEM will use facilities formerly owned by Mercedes-Benz in the
countryside of São Paulo. In 2023, GWM announced its plans to commence car
production in Brazil in 2024. The company has a factory located in Iracemápolis (SP),
approximately 167 km from São Paulo. Initially, two models will be produced: Poer, a
hybrid pickup truck with a flex-fuel engine, and an SUV.
The first GWM cars manufactured in Brazil are expected to hit the market in
mid-2H24. The initial 3-6 months will be dedicated to testing machinery and
manufacturing prototypes.
Image 2: GWM’s new manufacturing plant design in São Paulo
Source: Motor 1 and BTG Pactual
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B) BYD
BYD recently announced an increase in investments in Brazil. In late March, the
company declared it would boost its investment pipeline in the country by R$2.5bn,
bringing total investments to R$5.5bn.
Stella Li, CEO of the Americas and Global Executive Vice President of the company,
stated that the R$5.5bn will be invested quickly as the company looks to establish
production in Bahia state.
According to the automaker, the additional investment will be directed towards an

R&D center in Salvador, Bahia. The funds will also be used to expand the unit’s
production capacity. The automaker aims to double production capacity from 150k to
300k by 2025.
Further infrastructure investments are also planned in Camaçari. The complex is

expected to generate 10k jobs, with the first BYD vehicles set to be assembled by
YE24. Full car production in Bahia is projected to commence between 2024 and
2025, with installed capacity of 150k vehicles per year in the initial phase, potentially
expanding to 300k in a subsequent stage, as reported by BYD.
BYD's management has also announced the construction of five residential buildings
for factory employees. These developments, located 3.5km from the complex in an
area spanning approximately 81,000 m², will have the capacity to house 4.2k people.
Figure 8: BYD’s new manufacturing plant design in Camaçari, Bahia
Source: BYD and BTG Pactual
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Section 8. Other investments in the region

Here, we keep discussing the growing investments in the region by Chinese
automakers. Besides Brazil, the Chinese are also building a presence in South
America, as we show below.
China invests in South America

The benefits of China's policy support for the electric vehicle (EV) industry are
extending to other countries. Chinese investment in the global EV market has surged
forty-fold, from US$605mn in 2016 to +US$24bn by 2022.
As per a recent report by the China-Brazil Business Council (CEBC), the auto sector
captured 28% of Chinese investment in Brazil in 2022, or US$365mn. The report
notes that all Chinese projects announced in the sector were related to EVs and
energy transition, via the manufacturing of electrified buses and cars or as research
and development initiatives.
Tulio Cariello, author of the report and director of research at CEBC, said: "Brazil is a
key consumer market for vehicles from China." He added that Brazil "can serve as a
sales hub for Mercosur," the South American trade bloc shared with Argentina,
Paraguay, and Uruguay.
Figure 9: Chinese mining and infrastructure investments supporting Latin America’s EV industry
Source: United Nations Economic Commission for Latin America and the Caribbean and BTG Pactual
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Argentina is another South American nation benefiting from recent Chinese

investments in electric transport. In February, Chery unveiled plans for a plant
producing 20 EV models and lithium batteries in partnership with Chinese battery
company Gotion. The plant will be in northern Argentina, near the country's lithium
reserves. Alongside Bolivia and Chile, Argentina forms part of the "lithium triangle,"
home to two-thirds of the world's lithium reserves.
Like Brazil, Argentina faces the challenge of persuading China to invest in the local
industry. Flavia Royón, secretary of energy in the outgoing government of Alberto
Fernández, emphasized the need to collaborate with China in the development of
cells and batteries.
In 2022, Y-TEC, Argentina's state-owned energy industry research company,

announced plans to create the first lithium battery plant in Latin America, with start-up
expected before year-end. This initiative could boost Argentina's emerging EV
market, where only 240 were sold in 2022, while the hybrid segment sold 7,697, as
per Andefa (Argentina's version of Anfavea).
Chile has emerged as a leader in the electrification of public transport. A fifth of the
7.4k buses in the Santiago public network are electric. Chile's government launched a
policy in August to expand ´bus fleet electrification´ to another four regions by 2025.
Diego Mendoza Benavente, secretary-general of Chile's Automotive Association,

highlighted initiatives offering incentives to taxi drivers to transition to EVs. He said
the next phase will target interurban transport and private vehicles.
Chile aims to phase out combustion cars and buses by 2035 whilst continuing to
invest in mineral production for the energy transition. Last October, President Boric
announced that Chinese company Tsingshan will invest US$233mn in a plant in
Chile to produce lithium iron phosphate, used in some EV batteries.
Uruguay is also promoting, via government subsidies, electromobility in public

transport. In 2019, CUTCSA (#1 public transport operator) bought 20 electric buses
from BYD. In 2021, it announced it will no longer buy petrol vehicles for its fleet.
CUTCSA said the aim is to renew 25% of the fleet every 5 years in 2025-40, with the
entire fleet renewed. Uruguay´s consumer EV market is also growing, with sales up
7x since 2020, to 1,225 in 2022.
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Section 9. A key factor this time: electric vehicles (EVs)

Here, we explain a key element to explore Chinese brands´ success in the local
market: the growth of electric mobility. Given its competitive edge in producing EVs,
the migration to electric mobility should be a key driver in the growth of Chinese OEMs Chinese brands´ success in the local
in Brazil. market: the growth of electric mobility
The making of a global leader in EVs

It's no surprise that the largest investments in electric vehicles in Brazil – and Latin
America – originate from China. Just over a decade ago, the world's second-largest
economy identified the sector as an opportunity to become a global automotive
powerhouse and lead the energy transition in a world increasingly impacted by
climate change.
Figure 10: Global distribution of known raw material reserves as of 2019 production
As per Bright Consulting, a prominent consultancy firm in Brazil´s auto market, China
realized that this tech had the potential to solve several key problems, such as
reducing air pollution, dependence on imported oil, and rebuilding the economy after
the 2008 financial crisis.
Since then, China has become the world's #1 EV market, at 67% of global sales. 1 in
every 4 cars sold in China is an EV, a market share that continues to grow. Besides
domestic manufacturers like BYD and GWM, Tesla, a US-based company and a
leader in EV sales, also produces vehicles in China – manufacturing more in
Shanghai than at its most productive factory in California.
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China still has ~80% of the world's capacity for refining raw materials (lithium, nickel)
for batteries. In the past decade, it grew its battery recharging infrastructure 66x, with
~2mn public charging points nationwide.
Strong policy support has played a crucial role in helping China take the lead. The
Chinese government offered a range of subsidies and tax breaks to the EV industry
and consumers, totaling an estimated US$29bn in 2009-22.
One measure was to end tax on electric cars, making them cost the same as a
combustion vehicle. Although China's EV subsidies for buyers ended at the start of
this year, a new 4-year package of tax breaks worth a reported US$72bn was
unveiled in September.
Using EVs to explore brand positioning

Chinese EV brands have established a reputation of affordability, thus appealing to a
broader audience. Their competitive pricing ensures accessibility for many and is also
a compelling alternative to established brands´ pricier options. As price remains a key
barrier in the EV universe, this affordability gives Chinese brands a competitive edge.
Overcoming EV barriers takes more than just competitive pricing. It also requires tech
advancement. Chinese manufacturers were pivotal in rechargeable battery tech,
laying the groundwork for today´s EVs. But despite these huge contributions, Chinese
vehicles often go unnoticed, not receiving due credit for their innovation. Strong
marketing is needed for these brands to assert their rightful place in the history and
development of EV tech, ensuring global consumers recognize their capabilities.
Figure 11: Total new 2010-2019 light-duty electric vehicles deployed by where were sold (vertical axis) and produced
(horizontal axis)
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From a consumer perception standpoint, GFK Consultancy says Chinese EVs face a
unique set of challenges. Market trend data show that many Belgians, for example,
have doubts on Chinese EVs – though attitudes vary across countries depending on
Sino-regional relations. In Belgium, skepticism on China is a key barrier, with 47% of
consumers expressing distrust towards the country in general. 37% also believe
China produces low-quality vehicles.
Figure 12: Choosing Chinese: Chinese brands are highly popular in their domestic market and Asia, but still growing
in Europe - "How likely are you consider Chinese car brands from among the set of potential electric vehicles
available to purchase?"
Source: Roland Berger and BTG Pactual
In a world where brand association is key, 30% of consumers in our study were
unaware of any Chinese brands, while only 15% made the connection between
China and the EV market. This ´recognition gap´ shows the need for China´s
carmakers to up their branding efforts.
But it's not just about building awareness and mental availability. It also involves
altering perceptions. With 37% of surveyed consumers associating Chinese vehicles
with low quality, Chinese EV car brands have their work cut out. As they navigate the
path of offering competitive pricing, they must simultaneously reassure consumers
that affordability doesn't mean compromising on quality. Through a balanced
marketing approach that emphasizes value for money and unwavering quality
standards, Chinese EV brands can effectively reshape the narrative and cement their
position in the global EV arena.
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Chart 15: Estimated announced battery production capacity for 2019-2025, by region
Chart 16: Global public electric vehicle charger stock from 2011 to 2019 by market
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Section 10. A brief review of automotive electrification

in Brazil
With Chinese brands exploring electric mobility in the Brazilian market, in this section
we provide a brief review of the automotive electrification trend. While still lagging In this section we provide a brief review of
other countries, the electrification trend is gaining traction in Brazil. the automotive electrification trend, which
is gaining traction in Brazil
The treadmill of growing electrification in Brazil

Record sales of electric and hybrid vehicles, coupled with billion-dollar Chinese
investments, may be a turning point in Brazil’s auto industry and influence its South
American neighbors. Although electric and hybrid vehicles are less than 10% of the
Brazilian fleet, their sales more than doubled in recent years, prompting ABVE
(Brazilian Association of Electric Vehicles) to describe 2023 as "the year that
changed electromobility" in the country. When the share of EVs approached 5% in
other countries, the growth curve became exponential, said Thiago Sugahara,
director of ABVE and ESG manager at GWM´s Brazilian subsidiary, during a
broadcast last July. In addition to the surge in sales, two major investment
announcements disrupted the Brazilian market.
Chart 17: Automotive sales in Brazil by type of combustion – new energy vehicles (units)
In 2021, GWM acquired a former Mercedes Benz plant in Iracemápolis (São Paulo)
and announced plans to invest US$2bn in Brazil by 2032. Production of hybrid and
electric vehicles, including SUVs, is slated to commence in 2024.
Ricardo Bastos, GWM´s Brazil Head of Institutional Affairs, told news outlet Diálogo
Chino that the plant will initially produce 50k vehicles a year, with potential annual
output of 100k. To reach max capacity, it is relying on exports, with other LatAm
countries likely destinations.
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The second major investment this year was by BYD, the world’s #1 maker of electric
and hybrid vehicles, and occurred in a symbolic location for the energy transition: the
Camaçari complex in Bahia, one of the largest petrochemical centers in the southern
hemisphere.
The agreement materialized during President Lula’s visit to China in April 2023. In
July 2023, BYD announced a US$620mn investment in three Camaçari plants: one
for producing chassis for electric buses and lorries, another for hybrid and electric
cars, and a third for processing lithium and iron phosphate (for exporting) for vehicle
battery production.
The first 100% Brazilian EV, the BYD Dolphin, will roll out of Camaçari, and is already
one of the most popular imports in the country. Alexandre Baldy, advisor to BYD in
Brazil, said Brazil is one of the main auto markets, and will be BYD´s Latin America
hub. It will help introduce green tech, opening the market to the rest of the region.
In 2022, Chinese electric bus manufacturer Higer Bus unveiled plans to invest
US$50mn in a factory at the Port of Pecém, in Ceará – a region also targeted for
green hydrogen production. In a meeting with Vice President Geraldo Alckmin in July
2023, Higer’s Latin America Director, Marcelo Barella, said the company wants to
make Brazil its export base for Latin America.
Volvo, majority-owned by Chinese company Geely, unveiled last year a US$181mn

investment in its plant in Curitiba (Paraná), earmarked for decarbonization R&D. By
2025, Volvo – which boasts some of the best-selling EVs in Brazil – plans to invest
US$308mn in Brazil.
Representatives of car companies consulted by local news outlets spoke of Brazil

offering competitive advantages to become a regional hub for EVs. They highlighted
Brazil´s auto industry facilities, which cover diverse production stages (from
manufacturing parts to assembly), and its predominantly clean energy mix based on
hydroelectric power and reserves of lithium, essential for EV battery production.
As per Paulo Roberto Feldmann, a professor at the University of São Paulo’s School
of Economics, China plays a "crucial" role in the EV sector´s development in Brazil.
But he cautions that Chinese companies primarily "want our market." Feldmann adds
that it’s "up to the Brazilian government to demand that China transfer technology,
support the creation of a national electric vehicle manufacturer, and train engineers."
Clear regulatory policy still under discussion

While neighboring countries are implementing plans to spur the EV industry, Brazil is
taking more time to announce a program providing consumer incentives aimed at
decarbonizing the transport sector. All the main EV markets that embarked on an
energy transition in the auto industry received incentives and public investment.
Brazil´s government recently announced the end of tax exemption on the import of
EVs, a measure criticized by ABVE.
ABVE says reducing import tax is a way of encouraging the EV market in the country.
Consumers get to know the product and it encourages the birth of a new ecosystem
necessary for national production. If the tax increases, ABVE says it could put the
brakes on this market in Brazil and decelerate the plans of companies that are setting
up base here.
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Chart 18: Share evolution of electric and hybrid vehicles in Brazil
As per news outlets, Chinese manufacturers hope the sector will be a priority on the
government’s environmental agenda. One key signal was the appointment of
Adalberto Maluf, who previously worked at BYD and ABVE, to be Head of Urban
Environment.
Maluf already stated that his department is working to electrify public transport.
Despite delays in launching the national green mobility plan, in August 2023 the
government approved US$2bn to finance the purchase of electric buses, and
relaunched a dormant project: the National Platform for Electric Mobility, which brings
together government, academia, and companies to debate sector policies.
Despite recognizing that there is no clear regulatory environment yet, Maluf said
there is plenty of political will. He sees electromobility taking a leap forward in Brazil
in 2024, mainly in the bus sector, as municipal elections may prompt mayors to
pledge to renew their local fleets as part of their campaign. He said plans are
underway for bus networks, such as Rio de Janeiro city council’s plan to electrify
100% of its fleet by 2032, and São Paulo targeting 20% by 2024.
The government gave US$70mn to the Pará state government to buy 265 electric
and natural gas-powered buses for its capital, Belém, which hosts the COP30 climate
summit in 2025, and the government aims to reposition the state and its capital as a
global model for sustainability.
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Section 11. The discussion on import tax

Here, we summarize the new import tax regime for EVs in Brazil. The government
recently approved new measures, sparking a sector debate.
New EV import tax regime

At the end of 2023, the government unveiled a resolution formalizing the
reinstatement of import tax on EVs from January 2024 on. The decision was
announced two weeks ago by Gecex-Camex (Foreign Trade Chamber Executive
Management Committee).
According to the government, the measure aims to help develop the national
automotive chain and contribute to the country's neo-industrialization project. "The
resolution establishes a gradual resumption of rates and creates initial quotas for
duty-free imports until 2026. These quotas will be established via a decree to be
published in December," the statement said.
The percentages of progressive tax reinstatement will vary with the levels of
electrification and the production processes of each model, in addition to domestic
production. Thus, in the case of hybrid cars, the tax rate starts at 15% in January
2024; 25% in July 2024; 30% in July 2025; and reaches 35% in July 2026. For plug-in
hybrids, it will be 12% in January 2024, 20% in July 2024, 28% in July 2025, and 35%
in July 2026. For electric vehicles, the sequence is 10% (January 2024), 18% (July
2024), 25% (July 2025), and 35% (July 2026).
Chart 19: Announced import tax regime for electric and hybrid vehicles
Source: Brazilian government and BTG Pactual
There is also a fourth category, "EVs for cargo transport," or electric trucks, which will
start with a 20% tax rate in January and reach 35% in July 2024. In this case,
reinstatement of the full rate is faster because there is sufficient domestic production.
The re-entry schedule enables the continuity of companies' development plans and
respects manufacturing maturity in the country for each tech involved. The resolution
also brings global quotas for duty-free imports, established by model and with
declining values until July 2026. Companies have until June 30, 2026, to import
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duty-free up to certain quota values.
- Hybrids: US$130mn until June 2024, US$97mn until July 2025, US$43mn until
June 30, 2026.
- Plug-in hybrids: US$226mn, US$169mn, and US$75mn for same dates.
- Electric cars: US$283mn, US$226mn, and US$141mn for same dates.
- Electric trucks: US$20mn, US$13mn, and US$6mn for same dates.
Chart 20: Sales of imported BYD and GWM cars in Brazil (2023 and 2024
YTD)
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Section 12. A quick look at Brazil’s charging

infrastructure
Here, we summarize Brazil’s electric vehicle charging infrastructure. Stronger
In this section we summarize Brazil’s
demand for EVs means available infrastructure is key in sustaining the strong volume
electric vehicle charging infrastructure
growth of past years.
The state of charging infrastructure in Brazil

Brazil should more than double its electric car charging infrastructure by YE25. ABVE
estimates it will reach the milestone of 10k charging stations in the next 2 years (vs.
4.6k today).
Chart 21: Number of EV chargers in Brazil ('000 units)
Source: ABVE and BTG Pactual. (*) estimates
The number of electric vehicle charging stations has risen in recent years, reflecting
greater adoption of electrified cars in Brazil and partnerships between fuel distributors
seeking to adapt to the market and automakers aiming to expand their electric vehicle
offerings.
In February, fuel distributor Raízen and electric vehicle manufacturer BYD entered
into an agreement to install 600 charging points for electrified cars in Brazil. These
stations will be distributed across 8 capital cities.
Despite this growth, the distribution of charging points raises concerns on access to
electric models for many Brazilians, as +50% of charging stations are in the South
and Southeast, including nearly a third in São Paulo.
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Figure 13: Distribution of EV chargers by state in Brazil
Source: ABVE and BTG Pactual
The Brazilian Infrastructure Center recently explained that the high % of charging
stations in the more developed regions of the country is due to restricted vehicle
access in wealthier areas, owing to the high prices of electric vehicles.
Installing charging points depends on robust infrastructure for transmitting energy to

recharge vehicles. Regions outside the South and Southeast lack the capacity to
support a significant volume of charging stations due to the fragility of their
transmission systems.
Grid enhancements are necessary

Although 80-85% of EV charging is done at home, a strong public charging network is
crucial to meet user needs. Brazil has only ~4k public EV charging stations (as per
ABVE’s latest data), mostly consisting of level 2 chargers with 7.4-22kW power.
There are very few 100-kW level 3 fast chargers, and no standardized connection
protocols. Developing the charging infrastructure poses challenges in countries with
vast territories, such as Brazil and India.
The cost of installing EV supply equipment is USD30-80k. As per ANFAVEA, Brazil

will require ~150k charging points by 2035, or a USD4.5-12bn investment. This will
necessitate a collaborative effort by vehicle manufacturers, companies interested in
providing charging infrastructure, and the government. Given the historical limitations
on government investment capacity, developing infrastructure will likely take much
longer than in leading countries.
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Figure 14: Framework of determinants of public charging choices
Source: Transportation Research Part D 121 (2023) 103824 and BTG Pactual
A smart grid integrates sensing and monitoring technologies into the power network,
enabling the bidirectional flow of energy and information. It plays a crucial role in the
integration of electric vehicles by facilitating energy supply and demand
management, which can mitigate the need for grid expansion. The rise in EV power
demand poses the risk of system overload, including power fluctuations, service
degradation, and potential blackouts.
Studies show an overlap between EV charging and residential peak loads, typically
occurring between 2pm and 6pm. Machine learning methods are being developed to
enhance charging network management, optimizing the demand side of vehicle
energy consumption.
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Section 13. Distribution strategy

Here, we shed light on Chinese carmakers´ sales strategy. One clear difference is
dealership strategy, as they are looking to sell cars at cost price to retail clients.
Inevitably, this different strategy triggered a nationwide discussion on Brazil’s new
vehicle distribution regulation.
China´s sales system

Rather than racing to transform to a direct sales or agency sales model in China,
OEMs mainly adopt general agency and dealership models overseas to open up the
market in a quicker, asset-light way, though they are also exploring a more flexible
combo of retail models in different regions. Deloitte says most OEMs will still rely on
dealers to varying degrees in the next 3-5 years, given the tight schedule for entering
new markets, difficulties in building channels, and the return on investment.
Alongside sales, Chinese OEMs also use innovative customer services as a key
differentiator to thrive in new markets. Based on domestic experience, OEMs seek to
provide high-quality, end-to-end services throughout the user life cycle to improve
customer experience. Many of these OEMs will launch subscription services and
financial leasing services abroad to lower the bar for customer purchases and
increase market exposure. Some new-energy vehicle OEMs focus on charging and
aftersales services.
The context of Brazil and the Lei Ferrari discussion

There is a legal process (available here) in Brazil’s Supreme Court (STF)
concerning a bylaw known as Lei Ferrari, grounded on a September 22 technical
appraisal (available here) by CADE (antitrust authority), which identified
unconstitutional elements in this law governing commercial practices between
OEMs and car dealerships. The process relates to a discussion between
carmakers and dealerships, with OEMs looking to reduce their tax burden and
reference prices, eyeing higher volumes. Dealerships say the current model
safeguards customers' interests, though they admit changes are needed to face
recent sector changes (e.g. online sales). This isn’t the first time auto dealer
regulation has been questioned by market participants, so we believe discussions
will drag on.
Who’s behind such discussion?

As per specialized news outlet Automotive Business, carmakers are assessing
ways to sell cars directly to clients. This movement intensified last year, as
evidenced by the auto market´s slowdown in recent months. Selling directly to
clients would reduce OEMs´ tax burden, as direct sales use a cost price table
while dealerships’ price table runs on higher suggested prices. This mechanism
would even allow OEMs to practice lower prices, which is something they want
given the potential to improve volumes via more discounted prices.
Newswires state that one of the new carmakers in Brazil, China´s Great Wall
Motors, negotiated special terms with its authorized dealership network to use
cost price references in the local market, which is leading incumbent carmakers
to review their pricing policy. This led ANFAVEA (vehicle manufacturer
association) to discuss changes to the sector status quo with FENABRAVE
(dealership association), which argues that the dealership system offers better
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consumer safeguards, and that only minor changes to Lei Ferrari are necessary.
As the legal process continues, discussions should lead to questions on the

sector structure, as Lei Ferrari dictates that all vehicles must be sold to end
clients via dealerships. If such a monopoly is broken, there is room for industry
dynamics, mainly at dealership level, to change significantly. Lei Ferrari
discussions have become frequent over the last couple of years, mainly with the
rise of car rental companies as the sector’s largest buyer, and the consequent
rise in direct sales. Brand and regional exclusivity attached to each dealership are
constantly mentioned as needing revision. With the growing digitalization of auto
sales, the sector believes there is room for changes to Lei Ferrari, which even
FENABRAVE seems to favor.
Below we briefly compare the dealership model in different regions
Table 6: Auto dealers regime comparison around the world
Source: CADE and BTG Pactual
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Section 14. Side-effects – lower prices

Here, we discuss one of the main side-effects of the entry of Chinese/EVs: falling
auto prices. We are already seeing this trend in Brazil, similar to what happens
abroad (e.g. in the US).
Is China exporting deflation?

As per The Economist (available here), just 5 years ago China's car exports easily
lagged Japan, the former global leader in exports. But recent data reveal a significant
shift: in 2023, China's car exports surpassed 5mn vehicles, outpacing Japan. China's
leading car manufacturer, BYD, sold 500k EVs in the last quarter alone, surpassing
Tesla. The allure of Chinese EVs lies in their attractiveness, innovation, and, crucially,
affordability, with a shortage of shipping vessels the main limitation on their export. As
global decarbonization efforts escalate, demand for these vehicles is expected to
soar, potentially doubling China's global market share to one-third by 2030 and
challenging the dominance of Western automakers, mainly in Europe.
Rich-world policymakers may feel forced to shield their car industries from the
onslaught of state-supported Chinese competition. But imposing barriers against
Chinese cars would be shortsighted. The huge benefits of accessible, eco-friendly
vehicles far outweigh any potential disruption or perceived threats. The evolving auto
landscape, marked by the transition to EVs, shows industry upheaval is inevitable
regardless of trade dynamics, with advancements in technology driving significant
changes in manufacturing processes and employment patterns.
Facilitating trade with China offers numerous advantages. Affordable cars not only
free up consumer spending for other goods and services, particularly amid
inflationary pressures, but also provide access to superior quality and technologically-
advanced vehicles. Contrary to conventional wisdom, a thriving car industry does not
guarantee economic prosperity, as demonstrated by Denmark's high living standards
despite a negligible presence in car manufacturing. Embracing Chinese cars not only
accelerates the shift towards sustainable transportation but also mitigates the
financial burden of transitioning to a net-zero emissions economy, making
environmentally friendly options more accessible to consumers worldwide.
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Chart 22: Price comparison - Chinese cars (BYD & GWM) vs. its main non-chinese electric peers
Figure 15: Selected cars for our price comparison study
Source: BTG Pactual
We ran a price impact analysis per range of cars, where we compared different types
of vehicles (see Car Rental section in part 2).
Price war
The entry of BYD, with its imported models, has stirred up competition in Brazil´s
automotive market. The introduction of the Dolphin, its electric hatchback, priced at
R$149.8k, garnered major attention, resulting in 3k orders within 3 months of launch.
By October, and along with other models, BYD had sold 8,782 vehicles, as per
Fenabrave.
As per local news outlets, after the Dolphin's debut, direct competitors responded
with price cuts. The Renault Kwid E-Tech, first priced at R$150k, fell R$10k in August
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and R$16.5k this month, to R$123.5k. Prices of other models, like the JAC JSI and
the Caoa/Chery iCar, also fell.
Competition intensified with the recent arrival of the GWM Ora 3, priced at
R$150-184k for the sportier version to be delivered this week. GWM's purchase of
Mercedes-Benz´s Iracemápolis plant signals its plan to grow production, introducing
hybrid and electric models.
This pricing pressure has extended beyond electric and hybrid models to affect
combustion engine SUVs in the same price range. The market response underscores
the increasing influence of Chinese manufacturers in shaping pricing dynamics in
Brazil's auto sector.
Chart 23: Average transaction price for new cars in the United States
Source: Cox Automotive, Washington Post and BTG Pactual
Implications of import tax

The impending reintroduction of Import Tax, starting gradually in January, is set to
impact pricing competitiveness. Ricardo Bastos, Head of Institutional Relations at
GWM and Head of ABVE (Brazilian Electric Vehicle Association), reckons companies
will adjust prices of imported models in response to tax changes. Besaliel Botelho, a
BoD member at Bright Consulting and ex-CEO of Bosch South America, contends
that Chinese manufacturers will keep cutting prices to maintain market dominance,
irrespective of tax implications.
The current tax structure, with a 35% tax on imported cars and zero tax on electric
cars since 2015, will undergo changes. From January, a gradual return of import
taxes will commence, reaching 35% by July 2026 for electric cars. Hybrid vehicles will
also see tax adjustments, starting at 15% and reaching full taxation by July 2026.
In its presentation on the auto sector in October, Anfavea attributed lower production
to higher imports. This trend underscores the potential impact of import taxes on
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market dynamics and local production. Anfavea wants full reinstatement of Import
Tax to spur local production and mitigate the impact of higher imports on Brazil´s auto
industry.
A quick look at the US market

In the US, the price of electric cars is plummeting so fast that they’re now almost as
cheap as gas-powered cars. Since EVs hit the market, car buyers have had to pay a
steep premium if they wanted a car that ran on batteries instead of a gas engine. 2
years ago, they would have paid US$17k more on average for a new electric car than
for a new gas-powered car. But that gap is rapidly closing (US$5k last month, as per
Cox Automotive). That’s an 11% markup over the average new-car price last month –
similar to the price difference between picking the base model of some cars vs. the
performance model that comes with all the bells and whistles. Tesla is setting electric
vehicle prices so low that they’re almost even with gas-powered cars.
Part of the reason EV prices are plunging is that consumers aren’t buying them as
fast as dealers and automakers expected. As the industry moves beyond enthusiastic
early adopters, it now faces car buyers worried about charging infrastructure and high
upfront costs. The drop in EV prices is part of a LT trend toward cheaper electric
cars, mainly due to falling battery prices. Batteries are ~90% cheaper than in 2008,
as per the US Energy Department.
Chart 24: Change in average US new sale price for top 10 EV models - February 2023 to February 2024
Source: Cox Automotive, Washington Post and BTG Pactual
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Section 15. Residual value risk management

Here, we discuss a side-effect of rapidly falling car prices: the deterioration of used
cars´ residual value. This trend is already on display in the US, and could happen in
Brazil as well.
Understanding the residual value concept

Residual value is a term that is commonly used in the auto industry, and refers to the
estimated value of a vehicle at the end of its lease or financing term. This value is a
key consideration for buyers and sellers as it can really impact the overall cost of a
vehicle.
Residual value is calculated based on several factors, including the make and model
of the vehicle, its age, its condition, and its anticipated market demand. In general,
vehicles expected to hold their value well over time will have higher residual values.
This is why luxury vehicles and certain brands tend to have high residual values,
while others don’t.
Residual value is important for several reasons. For sellers, it is a measure of the
vehicle's worth at the end of its lease or financing term, and it can help them
determine a fair price for the vehicle. For buyers, it is an indicator of the vehicle's
overall value, and it can help them determine whether a particular vehicle is a good
investment.
Figure 16: Factors affecting car depreciation and residual value
Source: Motion S and BTG Pactual
Four changes influencing residual values (RVs), according to McKinsey

Forecasting RVs can become extremely complex in the current environment.
McKinsey identified four structural shifts affecting residual values: macroeconomic
changes, tech disruptions, the new OEM competitive landscape, and regulation.
- Macroeconomic changes: Macroeconomic shocks and changes in legislation can

heavily influence used-car prices and increase their volatility. Semiconductor
shortages and the political turmoil in Europe drove a significant general price
increase in 2021–22, deeply affecting used-vehicle prices in Germany. Exhibit 2
highlights recent changes in the Manheim Index, a recognized financial measurement
of used-car values independent of underlying characteristics shifts. Considering what
lies ahead in terms of possible shocks and disruptions, one can expect price volatility
to remain high. Consequently, accounting for these macroeconomic changes in
leasing residual value estimations will remain a challenge.
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- Tech disruptions: We expect the car landscape in a decade to have few things in
common with today’s topography, with tech driving most disruptions. By 2030, if
battery ranges continue to increase as anticipated, many expect sales of electric
vehicles (EVs) to outshine those of traditional internal combustion engine (ICE)
vehicles. But predicting the depreciation of EVs is challenging because their residual
profiles can differ significantly from those of traditional cars. The EV used-car market
still struggles to emerge as a viable entity.
- New OEM competitive landscape: Competition among OEMs should intensify in

Europe, as Asian manufacturers start to really invest to buy European customers.
Polestar and MG, two Chinese-owned European brands, already posted strong sales
in 2021, while other Chinese OEMs (for example, XPENG and NIO) are only starting
to unveil their full acquisition potential. This competition has changed the overall
distribution dynamic by focusing on direct-to-customer (DTC) models, which is
changing OEM pricing strategies and the landscape itself.
- Regulation: This also directly impacts price volatility. Bans on diesel vehicles in
specific cities (e.g. Paris, Madrid, and Athens by 2025) tend to reduce prices of diesel
cars, while public subsidies on EVs have the opposite effect. 17 European countries
were offering purchase incentives such as bonus payments or premiums to buyers of
EVs.
Figure 17: Hertz's Announcement of Electric Vehicle Fleet Reduction
An example from the US market

Hertz announces huge EV sale
Hertz recently unveiled plans to cut a big part of its electric vehicle (EV) fleet, a
move that surprised the global auto and car rental industries. It said it will sell
~20k EVs in the US, or about one third of its global EV fleet. Despite initially
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aiming to convert 25% of its fleet to electric by YE24, company executives stated
that they will now focus on gas-powered vehicles, attributing the shift to higher
expenses associated with collision and damage. Management anticipates
US$245mn in depreciation charges related to EV sales in Q4.
Slashing its EV fleet

Global news outlets echoed Hertz's decision last week to sell ~20k electric
vehicles, including Tesla's, from its US fleet. The move comes ~2 years after
Hertz signed a deal with the automaker to offer its cars for rent. It cited higher
expenses related to collision/damage as the reason for the shift, despite earlier
indications of product adjustments. CEO Stephen Scherr had previously flagged
headwinds from higher expenses for its EVs. As per US media reports, Hertz had
even limited the torque and speed of its EVs and offered them to experienced
users on the platform after some users suffered front-end collisions.
Higher-than-expected asset costs drive the shift

Hertz expects US$245mn in depreciation charges related to EV sales in its Q4
results. Industry experts say that despite higher EV demand and clients enjoying
the driving experience and fuel savings, there are "hidden costs" related to EV
ownership. Hertz has consistently reported high expenses related to collision and
damage, mainly linked to EVs. This led Hertz to emphasize its commitment to
improving the profitability of the remaining EV fleet. Some have linked Hertz's
decision to Tesla's pricing policy, as the manufacturer has consistently cut prices
to drive sales.
What to expect in Brazil

With the entry of Chinese manufacturers, fierce competition among car
manufacturers is becoming prevalent, with pricing one of the primary battlegrounds.
While competitive pricing can benefit consumers in the short term, it has significant
implications for the residual value of cars – a critical factor for buyers and sellers in
the secondary market.
The impact of price competition

Faster depreciation: Aggressive price competition often means lower initial new car
prices. This may attract buyers at first, but it also accelerates depreciation rates. As
new models flood the market at lower prices, older models may depreciate faster,
affecting their residual values.
Market saturation: Intense price competition can result in market saturation, where
an abundance of similar models floods the market. This oversupply can further drive
down prices and diminish consumer interest in older models, ultimately reducing their
residual values.
Brand perception: Price wars may trigger consumer perceptions of lower quality or
reduced value. Even if a car is objectively well-built, deep discounts may lead buyers
to question its LT worth, impacting its residual value when it enters the secondary
market.
Resale market: Lower residual values for newer models can also influence the
resale market. Owners of older cars may find it challenging to command reasonable
prices when selling or trading in their vehicles, leading to potential financial losses.
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Mitigating strategies
Despite the challenges posed by fierce price competition, several strategies can help
mitigate its impact on residual values:
Focus on differentiation: Car manufacturers should emphasize factors beyond

price, such as innovative features, superior quality, and excellent customer service.
Building brand loyalty and perceived value can help maintain stronger residual values
over time.
Strategic pricing: Rather than engaging solely in price wars, manufacturers can
adopt strategic pricing approaches that balance competitiveness with LT brand value.
This might involve emphasizing value-added services or bundling options to justify
higher price points.
Invest in quality: Prioritizing quality and reliability in manufacturing processes can

boost a car's reputation and perceived value, meaning stronger residual values in the
secondary market.
Lease programs: Offering attractive lease programs with favorable terms and
guaranteed residual values can provide consumers with more confidence in the LT
value of their vehicles, boosting resale prices.
Figure 18: Chinese car brands improve in quality - Number of problems in Chinese cars converged with the US
market average
Source:J.D. Power Initial Quality Surveys for China and US. Note: Based on surveys of vehicle owners in China and US. Data included up to 2019 due to
methodology change in 2020.
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Section 16. Forecasting Chinese EV growth in Brazil

In this section, we rank what we believe to be the most reliable growth estimates for
EVs in Brazil. Despite the significant variation in forecasts, they all point to continued
strong growth.
Energy Planning Company - EPE

According to Brazil’s Energy Planning Company (EPE), EVs are gaining traction in
the country, spurred by state and municipal incentives such as exemption from car
rotation restrictions and tax breaks in certain jurisdictions.
Entry barriers are initially expected to limit demand for electrified vehicles (BEV +
HEV) among premium light vehicle buyers, but penetration should gradually increase,
followed by rapid expansion next decade, albeit with a strong emphasis on hybrids.
EPE forecasts that the HEV/BEV fleet will exceed 1mn vehicles by 2030.
Chart 25: Electric and hybrid vehicles sales
Source: EPE and BTG Pactual
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Chart 26: Total fleet by fuel technology in Brazil
Source: EPE and BTG Pactual
Strategy&, a PwC Company

A recent study on vehicle electrification conducted by Strategy&, the global strategy
consulting team at PwC, suggests that electric vehicle (EV) sales in Brazil will rise
significantly from 2027 onward. Strategy& forecasts that the country's EV fleet will
exceed 35mn by 2040. The pace of electrification could be influenced by the
availability of different EV models, particularly in the commercial vehicle segment,
and the development of charging infrastructure.
The study suggests that increased vehicle electrification will lead to a significant
reduction in fossil fuel consumption. By 2030, it is estimated that annual gasoline and
diesel consumption will fall by 8bn liters (12% of current demand) and 6bn liters (10%
of current demand), respectively. By 2040, the reduction in fossil fuel consumption is
expected to reach 41bn liters for diesel (66% of current demand) and 37bn liters for
gasoline (59% of current demand).
Strategy& forecasts that 26% of light trucks and buses, 11% of passenger vehicles,
and 80% of heavy trucks will be electric by 2030. In comparison, 65% of vehicles are
expected to be electric by 2040, with a 51% penetration in heavy trucks and 37% in
passenger vehicles.
Impacts on electricity and fossil fuel consumption

- The annual consumption of the battery-powered electric vehicle fleet
(considering only light vehicles) should be close to 4.4 TWh in 2030, representing
0.5-1.5% of electricity consumption in Brazil.
- Annual fossil fuel consumption is expected to fall by ~14bn liters of gasoline

equivalent, representing 5-9% of current demand.
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Section 17. Is electrification really the best solution?

In this section, we present a counterargument to the vehicle electrification narrative in
Brazil. Many industry specialists argue that electrification alone will not be enough for
the country to achieve its decarbonization goals, suggesting that focusing on biofuel
technology might be a better alternative.
Questioning the overall impact of electrification

An article published in the MIT Technology Review presents compelling arguments
that challenge the benefits of increasing electrification in Brazil compared to
potentially greener solutions like biofuels.
Chart 27: Carbon footprint in vehicles
Source: Veículo Classe C, AEA, Novacana and BTG Pactual
“The explanation for this lies in the comprehensive assessment of the car's life
cycle, from the acquisition of raw materials or natural resource generation to the
disposal or final disposal of the car. In fact, the electric car has a significant
sustainability advantage during its usage phase, but still lags far behind in the
stages of raw material production, manufacturing, and final disposal.
On the other hand, we need to consider that the decision on energy sources
depends on the context under analysis. In the specific case of the electric car, an
example of this is in the statements of the president of Volkswagen Latin
America, Pablo Di Si.
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In an interview with the newspaper O Estado de São Paulo in 2021, the executive
stated that he convinced the company's headquarters in Germany that the best
option in Brazil would be to invest in the development of biofuels, not electric
cars. His main argument was that ethanol-powered cars emit up to 80% less CO2
than gasoline-powered cars, and he also emphasized that the country already
has an entire structure set up for ethanol production and supply, including the use
of sugarcane bagasse for the production of biomethane and biogas.
From these considerations, we need to understand that the electric car, despite
being one of the viable sustainability options, is not a solution free of negative
impacts. In fact, every energy solution should be analyzed from a systemic
perspective, where sustainability reflects the balance between energy source
options, seeking the lowest final cost for the environment and society. It is a fact
that even renewable energy sources will exact their toll on the environment. The
list includes impacts such as human health damage, noise, pollution, greenhouse
gas emissions, ozone layer depletion, poisoning, flooding, impact on inhabitants,
river drying, and deforestation, among others. In reality, the intensity of the
negative impacts of renewable sources will depend on various factors, such as
scale, method, and location of energy production and use. Therefore, the
decision on an energy matrix should take into account the positive and negative
aspects of the entire energy production and consumption system of the
environment under analysis.
Thus, the electric car cannot be analyzed in isolation, nor simply compared with
the fossil fuel-powered car. We must consider not only the gains from using the
electric car but also the damages caused by its production and disposal. The
production and use of clean and sustainable energy are imperatives of our times,
but current energy matrix decisions will impact the country's life for decades. Far
from exhausting the subject, the aim of this article is to draw attention to the fact
that these decisions need to be carefully considered and widely discussed from a
technical and economic perspective, considering the characteristics and needs of
each country. It is not about a single and definitive solution but rather a medium
and long-term research and planning process involving all sectors of society.
When it comes to energy generation, there is no magic solution or "silver bullet”.”
The case of Brazil

As Brazil is less dependent on energy imports than many other nations, it does not
face the same pressures to rapidly electrify its fleet. Brazil also boasts a well-
established biofuels market that generates significant economic activity and
employment. And although there are opportunities for improvement, it does not have
the same urgent demand to reduce local air pollution. Finally, subsidizing electric
vehicles competes for resources with other growth and income distribution initiatives.
The availability of domestically produced renewable fuels, along with established

capacity, widespread flex-fuel technology, and shared infrastructure with fossil fuel
supply, enables the country to better manage the pace of electrification in line with
global industry development, without the need to commit to a specific route.
Early adoption of innovations and technological lock-in entail investments in

technologies that may eventually become obsolete. Factors affecting the pace of
electrification adoption in Brazil include the capacity for renewable fuel production
and the establishment of an industrial park capable of developing local technologies,
as seen with flex-fuel technology.
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Chart 28: Global ethanol production (bn of liters)
Source: US Department of Energy and BTG Pactual
Chart 29: The carbon footprint of ethanol-running cars is highly competitive
Source: Associação Brasileira de Engenharia Automotive (AEA) and BTG Pactual
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Part 2 – Read across for our coverage

In this section, we provide several exercises and observations to shed light on the
trajectory of Chinese electric vehicles (EVs) in Brazil and the implications for the
companies under our coverage.
One significant consequence of the growing presence of Chinese EVs in Brazil is the
potential disruption it poses for traditional car makers. Established players may face
stronger competition as these newcomers leverage their competitive advantages, like
lower production costs and innovative technologies, to steel market share.
Furthermore, the influx of Chinese EVs could drive changes in consumer preferences
and behavior. As consumers become more environmentally conscious and seek
sustainable transportation options, they may increasingly gravitate towards EVs,
thereby reshaping the demand landscape in the automotive sector.
Moreover, the rise of EVs in Brazil could have broader implications for the country's
energy infrastructure and environmental policies. Increased adoption of electric
vehicles may necessitate investments in charging infrastructure and renewable
energy sources to support the transition towards cleaner transportation.
For the companies we cover, these developments present both opportunities and
challenges. On one hand, they must navigate the evolving competitive landscape and
adapt their strategies to remain relevant in a market increasingly shaped by EVs. On
the other hand, there is ample opportunity for these companies to capitalize on the
growing demand for EV-related products and services, such as battery technology
and charging infrastructure.
Table 7: Main opportunities / threats on growing Chinese share for companies under our coverage
Source: BTG Pactual
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Capital Goods
WEG
The market has long been speculating about the upside potential for WEG from the
expansion of electric mobility in Brazil, given the company's solid footprint in the
country and ability to deliver high-quality and affordable energy solutions. The hype Bus and truck electrification plus EV
began in 2017 when the project for the first Brazilian-manufactured electric truck was charger market
announced. Then in 2018, Brazil’s leading beverage company, Ambev, publicly
announced its goal to electrify one-third of its beverage distribution truck fleet, once
again sparking interest in WEG, which was among the key suppliers for the project.
In 2019, we published a special report elucidating WEG’s role in developing the e-

Delivery (which you can access here).
Project track record

e-Delivery was first unveiled to the public in early November of 2017 when the
Brazilian arm of Volkswagen Trucks and Buses presented the pure electric model
at Volks Group’s Global Innovation Day in Hamburg. Later that month, the model
was displayed to the Brazilian public for the first time at the 2017 edition of
Fenatran (Brazil’s largest road cargo transport trade fair). In August 2018, Ambev
and Volkswagen jointly announced that the beverage company would replace
one-third of its fleet with electric trucks, comprising 1,600 units, with the e-
Delivery being the first model contracted for its fleet renewal. In November,
Volkswagen announced the delivery of the second prototype to Ambev. In the
announcement, Ambev explained that the charging infrastructure would be built
using renewable energy systems, such as solar panels. In August 2019, the
companies celebrated one year of operational tests, providing fuel-saving metrics
for the period. Then, in mid-2019, Volkswagen announced its consortium to
produce the e-Delivery at scale. The OEM called the project e-Consortium and
announced it would be manufactured at its facility in Resende (Rio). The number
of partners expanded to include other suppliers such as Bosch, CATL, and Moura
(see figure below).
Image 3: e-Delivery electric truck model
Source: Automotive Business and BTG Pactual
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Weg to become an automotive supplier…at least for heavy vehicles

As a member of the project since its early stages and one of the vehicle’s
suppliers, Weg is inherently linked to the product’s success. Backed by positive
demand prospects, e-Delivery could ratchet up its share of company sales. Weg
already produces equipment for the auto industry by supplying the local electric
bus market, and its product expertise should be replicated in the truck segment.
As for light vehicles (highest volume in the automotive industry), current electric
car models produced globally generally leverage captive electric motor projects
and designs (as some OEMs, like Tesla, tend to see electric motor technology as
a competitive advantage). As electric car volumes expand, OEMs may switch
production to third parties, as occurs with internal combustion engines. This
migration should only occur once the Brazilian market has sufficiently large
volumes to justify the installation of local production lines dedicated to electric
vehicles, which should take time.
Figure 19: WEG's summary of powertrains solutions for different applications
What does the future hold for e-Delivery? Assessing market potential
Most of the addressable market for e-Delivery stems from: (a) medium-
sized/large truck fleet operators of (b) small trucks that provide (c) urban
distribution services in large urban areas. The requirement for (a) medium-
sized/large fleet operators reflects the high acquisition price (e-Delivery is 40-50%
more expensive than the regular diesel-drive Delivery model). As higher
acquisition/operating costs are diluted in larger fleets, we initially expect the
product to be introduced via medium-sized/large fleet players. The requirement
for (c) urban distribution in large cities reflects the availability of charging
infrastructure. Since e-Delivery’s range is estimated at ~200km, we still don’t
believe the product is suitable for long-distance cargo transport (where the diesel
solution still reigns supreme). Finally, (b) urban service is mostly carried out by
semi-light or light trucks due to restrictions on heavier vehicles in dense urban
areas. It is difficult to quantify the addressable market for electric trucks, but we
ran a few simulations nevertheless. We used ANFAVEA data to gauge the size of
the small truck fleet in Brazil, using sales of semi-light and light trucks in the past
ten years (available truck data per cargo capacity).
ANFAVEA gives us accumulated production volumes, which offer a read-across

for the fleet of newer trucks. Again, we only use semi-light and light models (up to
10-ton capacity) in the calculation. Since 2012, 193k semi-light and light trucks
have been produced in Brazil, or 25% of total truck output in the country (see
ANFAVEA data below). As such, we reach a potential market of 283k (25% of
total truck output in the last ten years).
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Chart 30: Truck production breakdown per type - 2024 YTD
Chart 31: Semi-light and light truck production evolution Chart 32: Semi-light and light truck share in total
('000) production evolution
Source: ANFAVEA and BTG Pactual Source: ANFAVEA and BTG Pactual
Updating our TAM calculation for the e-Delivery

In this context, we have revised our estimates based on information from ANFAVEA,
indicating that there are approximately 188,727 light trucks in Brazil that are less than
10 years old. This figure could serve as a reliable proxy for EV potential, as buyers
are likely to prefer operating younger fleets. Within this volume, we believe a
significant portion is utilized in urban areas, given that small vehicles were originally
designed for last-mile delivery services, primarily within urban settings (our
conservative base case assumes that only 60% are used in urban areas). We have
also explored various scenarios for transitioning to electric trucks. Considering
electric trucks as a pioneer product, we anticipate that the conversion to electric will
be minimal in the initial stages. Therefore, we have assumed migration scenarios of
10%, 20%, and 30% over a five-year period.
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Our final assumption pertains to the sales price of the vehicles. Once again, we
anticipate that electric trucks will initially be sold at a premium compared to regular
diesel models (although this may change with the introduction of more affordable
Chinese products). Our base case assumes a unit price of R$950k. Combining all
these assumptions, our base-case forecast suggests a potential addressable market
of R$22bn for e-Delivery within five years, translating into potential sales of R$8.6bn
for WEG (equivalent to 3.5% of our estimated net revenues for 2024-28).
Naturally, the addressable market could expand significantly if there is a substantial

shift towards electric vehicles. For instance, if our assumption of 20% migration to
electric improves to 30%, the addressable market would increase to R$45bn, with
WEG's share rising to R$18bn (7.4% of sales in 2024-28).
Table 8: EV truck potential market
Source: BTG Pactual
The calculation of the total addressable market (TAM) for e-Delivery provides us with
just one take on WEG’s expanding presence in electric mobility solutions. We
anticipate that significant opportunities will emerge, primarily from two distinct types of
products and solutions:
a. Supply of electric vehicle components: Thus far, the company has indicated
that its primary involvement in this segment will revolve around the production of
electric powertrain components for trucks and buses. As we have already assessed
the light-truck model above, we will now conduct a similar assessment for buses.
b. Supply of electric vehicle charging infrastructure solutions: In addition to

supplying equipment for vehicles, WEG is poised to benefit from the increasing
demand for charging infrastructure in the country.
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Upside from electric bus market

Besides estimating the truck electrification market opportunity for WEG, we also did
an exercise on the urban bus market. Given the greener political agenda adopted by
many cities in Brazil, electric urban buses have gained traction recently. This is also
an interesting niche to test electrification solutions, given the short (accurate) routing
and the charging infrastructure (usually overnight). Many Chinese players, like BYD,
envisioned this opportunity in Brazil and began positioning their buses commercially
to attract the attention of local bus operators.
To estimate the market opportunity in urban buses, we used Sindipeças’ bus fleet
figures for Brazil and estimated the fair share of urban buses as a % of Brazil’s bus
fleet. Using the L10Y data on urban bus sales (as per FABUS), we reached a fleet of
387k, giving us a proxy for the number we´re looking for. Then, as we did when we
modeled the ´electric truck opportunity´, we tested the pace of ´fleet migration´ to
electric models (5, 10, or 15%).
Using a R$2.5mn proxy price for an average electric bus (as per local news and
producers), we estimate the size of Brazil´s electric bus market. We broke down the
total value of the market by WEG´s fair share in this market, dividing the share of
drivetrain components (15% of vehicle cost) and battery packs (25%). These are
preliminary calculations, and WEG’s final share of value in this industrial chain may
change a lot depending on how this tech evolves.
Table 9: Electric buses potential market
Source: BTG Pactual
Upside from EV charging infrastructure

At its last Investor Day, WEG said it is positioned to develop and manufacture
solutions for EV charging, such as chargers and related infrastructure. To assess the
market opportunity from these products, we obtained data from ABVE on the EV
chargers in Brazil (5k). ANFAVEA says Brazil will need to install up to 150k by 2030,
meaning 48k by 2028 if we use the same implied growth providing an estimate of the
number of chargers to be installed in Brazil in this period.
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Their low production scale means charger prices haven’t fully stabilized. We used
info from local news sources to reach a R$15-35k price range for household chargers
and up to R$300k for superchargers (fast vehicle charging infrastructure). The
cheapest charger, given their safety parameters and how easy they are to use, will
become the most widely available in Brazil.
Table 10: Electric chargers potential market
Source: BTG Pactual
Considering the big three growth drivers (electric trucks, electric buses, chargers),
electrification could be 7.7% of WEG’s top line in the long run (3.5% electric trucks +
3.9% electric buses + 0.3% EV chargers), an interesting free option for the company.
Chart 33: WEG's expected electric mobility representation
Source: BTG Pactual
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Iochpe-Maxion
Iochpe is one of the leading manufacturers of wheels and structural components in
the auto industry. In Brazil, it is clear leader in both segments. But the entry of
Supplying wheels and components as
Chinese cars disrupted its local market share as it doesn’t supply components for
Chinese players ramp up local output
imported Chinese cars. Although Iochpe has a manufacturing plant in China via a JV
with Chinese auto parts giant Dongfeng, it doesn’t serve the Chinese operations of
BYD and GWM.
As these OEMs establish manufacturing facilities in Brazil, Iochpe stands to become

a potential supplier. Given its strong market share and presence in the local market, it
is reasonable to expect Chinese OEMs to become clients once they start local
production (negotiations may even be underway). This applies to wheels and
structural components. Commercial terms negotiated with Chinese OEMs are
unlikely to differ significantly from those with other OEMs.
Chart 34: Iochpe-Maxion revenue breakdown by client
Randoncorp & Frasle Mobility

As our study shows that most Chinese newcomers are focusing on the light and
passenger car segment at Randon, the only subsidiary or unit with big exposure to &
light vehicles is Frasle Mobility. As a major local producer of original and aftermarket
components, Frasle doesn’t supply components for Chinese manufacturing in their
country. Thus, growth of Chinese imports reduces its addressable market, in terms of
fleet. But as Chinese manufacturers transition to local production, Frasle is well Supplying auto components, mainly brakes,
positioned to become a local supplier. as Chinese players ramp up local output
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Figure 20: Overview of Frasle’s auto parts product portfolio
While this transition may take time, Brazilian manufacturing of Chinese vehicles is
likely to rely on imported components. A long-term consequence of the proliferation of
EVs in the local fleet is the potential reduction in turnover for brake materials, as EVs
typically have lower friction component consumption. This poses a risk to the total
addressable market for replacement components if demand for replacement parts
falls. Companies may be able to offset this risk by charging higher prices for original
brake materials, given the greater complexity of the product, which could include
regenerative brakes.
Regenerative braking: basic considerations

In a hybrid or EV, braking combines the deceleration portion of two systems: the
electric motor of drivetrain operating as a generator, and the regenerative friction
brake (see below).
Figure 21: Overall vehicle structure
Source: SAE International and BTG Pactual.
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Tupy
Tupy holds a dominant position as a supplier of iron-casted blocks and heads. While
the Chinese vehicles entering the Brazilian market predominantly utilize aluminum
Supplying hybrid engine blocks and heads,
blocks, which are common in light vehicle models, there exists a significant
as well as battery recycling
opportunity for Tupy in the realm of hybrid vehicles. Hybrid vehicles typically utilize
ultralight iron-casted blocks, which are smaller in size due to the presence of
alternative electric powertrains, yet are expected to perform at comparable levels. We
view this as a compelling avenue for Tupy to explore, particularly as hybrid flex
motors gain traction, often fueled by biofuels or ethanol. This opportunity is expected
to become more apparent as Chinese manufacturers transition to becoming local
producers.
Figure 22: Plug-in hybrid electric vehicle diagram
Source: Environmental America and BTG Pactual
As the share of EVs keeps rising, Tupy should benefit from higher demand for battery
recycling. It invested in enhancing its metallurgical capacity to facilitate economic and
environmentally safe extension of batteries´ useful life. This strategic move positions
it to explore EV tech whilst contributing to sustainability efforts via responsible battery
management.
Image 4: EV battery pack
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Brazilian metallurgy multinational Tupy and the University of São Paulo (USP)
joined forces to address one of the main challenges facing EVs: battery recycling.
The partnership between the two entities will initially invest R$4mn to develop
tech for lithium batteries.
The project's aim is to find a viable alternative to the battery recycling process,
which uses pyrometallurgy, where raw materials are incinerated. This method has
three disadvantages: high energy consumption, high emissions, and loss of
recovered materials, mainly lithium.
Research will focus on hydrometallurgy, a process where raw materials are

dissolved in acidic solutions, and then the desired substance is extracted. This
method consumes less energy, emits fewer carbons, and ensures that more
materials are recovered.
Marcopolo
The arrival of Chinese buses in Brazil preceded the current surge in Chinese EVs.
Besides importing vehicles, BYD has been in Brazil since 2015, focusing on the
Growing electrification trend in local bus
electric bus market. Since then, it has made significant inroads into the local public
fleet
transportation sector, as several large cities gradually embraced the electrification
agenda in recent years. BYD has become a key partner of Marcopolo, which
manufactures bus bodies for Chinese electric bus chassis.
Image 5: Marcopolo and BYD’s electric bus model
Last year, we released a report on Brazil´s burgeoning electric bus market (see report
here):
Bus electrification continues to gain momentum

While electric buses have been around longer in Europe, electrification of urban
bus fleets in Brazil is gaining traction. Many cities´ greater focus on environmental
aspects has accelerated the usage of EVs. A prime example is São Paulo,
Brazil's largest city and home to its largest bus fleet, which aims to have 2.6k
electric buses (20% of fleet) by 2024. Once this trend takes hold in major cities, it
is only a matter of time before medium- and smaller-size cities follow suit.
Marcopolo offers a comprehensive range of products in the segment

Marcopolo has been involved in electric buses for some time. It already
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assembled EVs in Australia, China, and Colombia, and entered the Brazilian
electric bus market a few years ago. The entry of BYD into Brazil, along with its
strong marketing efforts in numerous cities and pursuit of export contracts, has
boosted electric bus volumes in the country. Although POMO hasn’t partnered
with Eletra, it recently launched its own fully integrated electric bus, Attivi ( see
report here), marking a major shift for POMO´s large bus division, as it now
produces chassis and bodies whereas previously its focus was on producing bus
bodies on BYD chassis.
Table 11: Electric buses potential market
Source: BTG Pactual
Marcopolo recently announced that in addition to providing the conventional bus body
solution for electric buses, it also developed its fully integrated product, comprising
chassis and bus bodies. It designed a model based on existing components and
assumed the responsibility for fully assembling this product. This initiative will help it
capture a big chunk of the electric bus market. The new bus model is named Attivi.
Image 6: Marcopolo’s Attivi bus model, 100% electric
Source: Marcopolo and BTG Pactual
Besides BYD, other Chinese brands announced plans to sell electric buses in Brazil,
such as Ankai (SHC Group subsidiary). The electric bus brand will be distributed in
Brazil by the same group than distributes JAC Motors’ vehicles in the country.
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Transportation
Car rentals (Localiza&Co and Movida)

The swift influx of Chinese EVs raised numerous questions among local investors
keen to understand the implications of such a sudden shift in market dynamics. With
the emergence of EVs, many are questioning the impact on demand for internal
combustion engine (ICE) vehicles and the subsequent effect on demand for used ICE
cars. This is a valid concern, mainly with the emergence of newer, more affordable Inflow of Chinese cars will bring vehicle
Chinese EVs. deflation and change depreciation patterns
The market is also wondering if car rental companies will be able to replicate their
advantageous purchasing conditions with Chinese manufacturers. Ultimately, all
these queries revolve around the market's apprehension over companies´
depreciation trends.
Car rental companies should continue to negotiate favorable purchasing conditions

with OEMs, given their strong purchasing power and the benefits they provide, such
as volume predictability and brand reinforcement. But we also suggest that car rental
companies adopt a cautious approach to the growing electrification trend, as they
seek to fully understand EV´s normalized depreciation curve. In this scenario, the
proportion of Chinese EVs in car rental fleets will likely be lower than in the country's
overall fleet.
In Europe, BYD signed an intriguing partnership with German car rental company
Sixt, involving the purchase of several thousand EVs. Sixt also agreed to buy 100k
BYD EVs by 2028, showing that Chinese OEMs may use local car rental platforms to
distribute and bolster their brands in regional markets. This serves as a promising
reference point for Localiza and Movida to negotiate attractive purchasing
agreements with Chinese manufacturers.
SIXT and BYD sign long-term partnership to boost e-mobility

SIXT and BYD, the world’s largest manufacturer of EVs (including BEVs and
PHEVs), signed an agreement. SIXT will initially order several thousand EVs from
BYD, the first of which will be available for SIXT customers in Europe in Q4 2022.
This initial order forms the first step in an agreement envisaging the purchase of
around 100,000 additional electric vehicles in the next 6 years. BYD and SIXT will SIXT and BYD sign long-term partnership
also explore co-operation opportunities globally. (see notice here) to boost e-mobility
<1% of Localiza’s fleet are electric or Chinese vehicles, with 96% formed by flex-fuel
vehicles. It signed some experimental contracts involving EVs with select local
partners, sharing the depreciation risk, mainly in its Zarp business. Some electric and
Chinese vehicles are used in the Fleet Management division, typically at the request
of clients, as with Meoo (subscription car program). But we believe these vehicles are
less competitive, and uncertainty over their residual value means it applies a much
more conservative depreciation model to such cars.
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Movida is also more cautious on growth of electric and Chinese vehicle shares in its
fleet, after a tough experience with a few electric cars. Several years ago, it
attempted to position itself as a pioneer in "new mobility" vehicles in Brazil. We
reckon new management opted for a more conservative approach due to the unclear
depreciation curves associated with such vehicles, leading them to cut exposure to
this segment to 0.5%. Movida is applying a conservative depreciation rate that is 3x
higher for EVs vs. regular ICE cars.
Car price study

To better understand price impacts from Chinese cars´ entry into Brazil´s auto
market, we compiled a vast car price database. We gathered info on the top selling
vehicles in Brazil and compared them with the prices of the main Chinese models.
We tested price variations based on 2022, 2023 and brand-new models to assess
different price behaviors for different models.
We also assessed the impact of Chinese cars on the pricing of non-Chinese, non-
EVs by comparing the price behavior of top-selling models in Brazil with the thriving
Chinese models. As discussed in earlier chapters, in other regions the entry of
Chinese cars and their price competitiveness drove down prices of other types of
vehicles, including non-EVs.
In the evidence we collected, despite the relatively short time window for the
experiment, we identified a few top-selling vehicle models whose pricing was
impacted by the entry of Chinese cars. Empirically, it is hard to justify the price
behavior of non-Chinese, non-EVs caused by China´s aggressive pricing. Other
effects must be in play, such as these vehicles´ already high pricing point versus the
pre-pandemic period.
In the early evidence we collected, there was a clear price slowdown in some top-
selling models, which we attribute to the entry of Chinese vehicles. China´s price
point competitiveness led to system-wide price movements in other vehicles (see
below for some of the key data we collected and processed in order to reflect this
pricing change exercise).
Our database was built upon the price indicators of FIPE, Brazil’s top automotive
pricing reference, for both new and used cars. With the pricing of the top-selling cars
collected, we looked for the models with the greatest overlap with the Chinese
models. We sought vehicles that have sales volume enough to create a fair statistical
analysis. We’ve gathered the selling performance of each model from FENABRAVE,
Brazil’s auto dealers’ association.
The price analysis also considers the models with most overlaps based on the
nominal prices of the main Chinese models. In that sense, we looked for the price
point of the Chinese vehicles and searched for vehicles that have pricing up to 20%
higher or lower than these Chinese models, as we believe this is the type of player
that faces bigger competition with them.
Let us know if you want access to our Chinese and non-Chinese car price database.
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Car price study - charts

Testing the impact of Chinese vehicles in different price ranges
We did a sensitivity test based on vehicle price ranges, dividing Brazil´s market into
ranges of R$50k in terms of price and comparing the price point evolutions of the top-
selling vehicles in each range. Some ranges don’t have Chinese vehicles as
statistical samples, but we did the test anyway to identify statistically significant
changes in price behavior. Table 12 shows the price ranges we used and the top-
selling vehicles included in the analysis for each range.
Table 12: Vehicle matrix by price - vehicles used in our study
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1st price range (R$100-150k)

Chart 35: Price evolution for 0km vehicles (R$100-150k range)
Chart 36: Price evolution for 2023 vehicles (R$100-150k range)
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2nd price range (R$150-200k)

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3rd price range (R$200-250k)

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4th price range (R$250-300k)

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6th price range (R$350-400k)

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Conclusion – Is the Influx of Chinese Cars Impacting Overall Auto Pricing

in Brazil?
Our goal was to assess the impact on the pricing dynamics of Brazilian cars following
the rapid entry of Chinese OEMs into the local market. As we are still in the early
stages of this trend (Chinese EV players weren’t relevant until 2023), it is hard to
draw definitive conclusions. But our analysis gathered enough evidence to suggest
that the arrival of Chinese OEMs already influenced the pricing of non-Chinese
vehicles in general. It is important to break down this impact into layers of overlap
with Chinese cars. We explain our rationale below:
(i) it is statistically significant to say that Chinese EVs already affected the price of
non-Chinese EVs. This is a natural conclusion given the major overlap in terms of
product positioning between Chinese and non-Chinese models (see chart below).
This impact mainly reflects the greater competitiveness of Chinese EVs, which helps
shift the price curve down in the EV niche;
Chart 48: Price comparison - Chinese cars (BYD and GWM) vs. its main non-chinese electric peers
(ii) in segments where Chinese competition has been present in Brazil for longer
(meaning the presence of competitive models, with statistically significant sales
volume since early 2022 or 2023), we notice a slight price slowdown in non-Chinese
models that overlap with these Chinese vehicles. This is the case with segments that
compete directly with models such as Haval, Yuan, Song and Tan. In this second
group, we found enough evidence to say that the presence of Chinese cars has
already deviated the pricing behavior of non-Chinese cars, including non-EVs, thus
confirming that ICE (internal combustion engine) vehicles are also showing related
impacts (see chart below); and
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(iii) in segments with zero overlap with Chinese players (meaning the current offering
of cars doesn’t fit the price range of Chinese products), we found no evidence to
suggest that non-Chinese cars have changed their pricing dynamics yet. Our analysis
involved a small sample of cars, as we focused on the top-selling models in Brazil to
look for statistical relevance. The chart below corroborates the reading that the price
slowdown in some categories was likely to happen even without the presence of
direct Chinese competitors. So, in this case, we cannot say the entry of Chinese cars
was the sole reason behind price point dynamics.
The verdict for car rental companies - has depreciation already arrived?
The importance of such a study for the car rental sector is to assess what’s already
priced-in in terms of depreciation trends and, thus, stock prices. The appropriate
answer needs to come in parts, as we did in the exercise above. Looking solely at the
EV fleet, we don’t expect additional depreciation changes, reflecting the very low
exposure to EVs of the companies we cover (<1% for Localiza and Movida).
We also need to assess their exposure to vehicles that directly compete with Chinese
newcomers (the second group mentioned above). As the above exercise considers
only the top-selling cars in Brazil, we believe rental companies have some exposure
to this segment and that cars in this group could require additional depreciation to
reflect the price dynamic change caused by the Chinese. In the third group, where
overlap with the Chinese is low, we don’t see the need for additional depreciation
adjustments.
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So, the entry of Chinese cars may affect ST car depreciation dynamics for the
companies we cover. We lack sufficient data to measure the extent of this impact (i.e.
fleet mix by vehicle model), but conservatively believe the most likely outcome is for
car rental players to ´endure´ higher depreciation rates for longer (focus on duration)
and not higher depreciation vis-à-vis current levels (as they are already at all-time
highs; see charts below).
Net income sensitivity

Using a simple exercise where we adjust Localiza's depreciation per car in the RAC
and fleet segments by up to 12.5%, our calculations indicate that our net income
forecasts would fall by up to 8% in 2024 and 7% in 2025. Using R$3.5bn and
R$4.6bn in net income for 2024 and 2025, bottom line would thus fall to R$3.2bn and
R$4.3bn, respectively.
Applying the same analysis to Movida, our calculations suggest our net income would
fall by up to 29% in 2024 and 14% in 2025. Using R$325mn and R$500mn in net
income for 2024 and 2025, bottom line would thus fall to R$230mn and R$432mn,
respectively.
Table 13: Change on Localiza's 2024e net income by Table 14: Change on Localiza's 2025e net income by
changing the depreciation per car changing the depreciation per car
Source: BTG Pactual Source: BTG Pactual
Table 15: Change on Movida's 2024e net income by Table 16: Change on Movida's 2025e net income by
changing the depreciation per car changing the depreciation per car
Source: BTG Pactual Source: BTG Pactual
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Chart 51: Quarterly evolution of Localiza's annualized RAC depreciation as % of fleet value
Chart 52: Localiza's RAC purchase and selling price evolution
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Chart 53: Quarterly evolution of Movida's annualized RAC depreciation as % of fleet value
Chart 54: Movida's RAC purchase and selling price evolution
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Machine rental companies (Armac, Mills and Vamos)

Equipment rental companies (Vamos, Armac, Mills) are increasingly exposed to
Chinese OEMs, albeit on a small-ish scale (averaging less then 5% of their fleets).
These players have strategically upped their exposure to Chinese equipment in order
to explore lower prices (typically 25-35% cheaper). The sample of tested Chinese
equipment is still limited, making it challenging to definitively assess the quality
compared to non-Chinese models.
Part of the reason Chinese exposure is structurally lower in heavy equipment rental Chinese players are relatively less relevant
than in light vehicle rental is due to the relatively slower pace of electrification in in heavy equipment
heavy rental. When it comes to diesel-driven engines, Western OEMs still dominate,
while Chinese manufacturers have yet to gain ground globally in terms of market
share. In light vehicles, Chinese players are already significant thanks to their
superior manufacturing scale.
Electrification is gaining traction in more niche applications like urban machinery and
on-road services, where there is more available charging infrastructure. So, we
expect Chinese players to start becoming major players in these segments. A good
example is the forklift sector, where Chinese players like BYD (with its electric forklift)
are already relevant. But we haven’t seen major efforts towards electrification in
heavier equipment like tractors, excavators, and steamrollers, which are typically
seen in remote, off-road sites.
Image 7: Examples of BYD electric forklifts
Source: BYD, Blod do Caminhoneiro and BTG Pactual
The rental equipment contract cycle is generally longer for equipment rental
companies, with truck rental and yellow-line contracts typically running for 3-5 years
(vs. 12-15 months for RAC and 30-36 for fleet contracts). Chinese newcomers have
thus yet to significantly impact overall equipment pricing. But if Chinese OEMs gain
more traction, it could affect pricing dynamics.
Companies past experiences in electric forklift

Vamos announced acquisition of BYD electric forklifts in April 2021
In April-21, Vamos announced the acquisition of forklift trucks linked to rental
agreements with BYD, a Chinese manufacturer of electric vehicles and forklift
trucks in Brazil. With the agreement, it acquired 436 electric forklift trucks already
linked to 39 long-term rental agreements with 26 customers and remaining terms
of 36 months, for a total of R$72mn in cash (50% upfront and 50% in 12 equal
monthly installments until May 2022).
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We welcomed the transaction for the following reasons: (i) it was in line with
Vamos’ strategy to foster investments in electric and clean energy assets, as
100% of BYD’s forklift trucks are 100% electric (not hybrid); (ii) rental rates were
similar to or better than Vamos’ consolidated yields, boosting its asset base; and
(iii) electric assets require less maintenance, so the average return on contracts is
higher (see our full note here).
Armac announced acquisition of Bauko in November 2021

In Nov/21, Armac announced the acquisition of Bauko, one of the largest forklift
rental companies in the Brazilian market, focused on renting electric and
combustion-engine forklifts via LT contracts (see our report here). Armac paid
R$213mn (R$107mn upfront and the remainder in 18 monthly installments of
~R$5mn, with a final installment of R$13mn to be paid in 60 months), implying an
accretive 4.3x EV/EBITDA. At the time of the acquisition, the company had ~2.9k
machines, with a small share being electric, expanding Armac’s know-how in
electric machinery.
Given the lower penetration of Chinese manufacturers, we expect less depreciation

pressure on machine rental players versus light vehicle players, mainly as there is no
sharp price adjustment in machine rentals, different to what we are seeing in light
vehicle rental.
Chinese manufacturers have yet to overcome clients´ resistance barrier when it

comes to vehicle maintenance. They have already convinced Western clients that
their light vehicles are as good as the Western ones. But in terms of heavy
equipment, there is still a customer barrier, as maintenance is a more significant
aspect of the yellow-line business.
Demobilization of heavy equipment assets is key in heavy vehicle rental, mainly for
players more focused on leasing (Vamos, Mills). Uncertainty on the resale of used
Chinese machines makes rental players more conservative when opting to buy
Chinese-made equipment.
Details by company
#1) Armac: 2% of Armac´s fleet is sourced from Chinese OEMs, with prices 25-35%
below similar machines of non-Chinese producers. So far, it has negotiated similar
purchasing terms with Chinese OEMs as it has with other producers. If it places
larger orders, it may secure higher discounts.
#2) Vamos: Vamos has limited exposure to Chinese OEMs, mainly concentrated in
the electric forklift segment, where Chinese manufacturers are highly competitive.
About half of its forklift fleet is electric, while its exposure to Chinese-made trucks and
other equipment is minimal, resulting in total fleet exposure to Chinese OEMs of less
than 4%. Vamos has secured favorable purchasing conditions with Chinese OEMs,
leveraging its significant market share in forklifts. However, the Chinese equipment
tested so far has required more maintenance, and there is room for improvement in
post-sales service, notably in reducing lead times for importing parts.
#3) Mills: Mills also has low exposure to Chinese OEMs, representing ~5% of its total
fleet, primarily concentrated in the aerial platform segment. As LatAm's largest aerial
platform player, Mills secures advantageous purchasing terms with Chinese OEMs,
which are notably better than those offered by non-Chinese manufacturers. Despite
the better terms, Mills does not factor origin into pricing and charges the same yields
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as non-Chinese equipment. Thus far, management hasn’t noted any difference in

maintenance costs as a percentage of equipment price.
Image 8: Example of a Chinese Aerial Platform
Source: AliExpress and BTG Pactual
Tegma
As one of the leading new vehicle logistics companies in Brazil, Tegma is
strategically positioned to handle the increasing volume of Chinese vehicles. It is
responsible for the logistics of distributing BYD vehicles nationwide, and its GDL Already signed a new vehicle logistics
operation in Espírito Santo oversees the import operations of BYD and GWM – 2023 contract with BYD
results already showed the positive impact of this volume growth. The decision to
import vehicles via Espírito Santo reflects tax breaks for importers in the state.
As BYD scales its production volume at Camaçari, this poses a big opportunity for
Tegma. Prior to this, Tegma handled logistics for Ford in the region. So, BYD´s
stronger local production should provide a major volume boost to Tegma's operations
in the region.
Figure 23: A summary of Tegma’s vehicle logistics services
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Simpar
Besides its aforementioned listed subsidiaries, like JSL and Movida, Simpar is also
exposed to the inflow of Chinese cars into Brazil via its auto dealer subsidiary
Grow its auto dealer business by
Automob, specialized in managing sales of new vehicles from a plethora of brands
representing Chinese brands
via Brazil´s largest dealership network. Automob has dealer contracts for three
Chinese auto brands: Chery, BYD, and GWM. In 2023, sales of Chinese vehicles
were 2% of Simpar´s auto sales. The YTD share is even higher, tracking the sector-
wide trend. Given Simpar´s major leverage and access to capital markets, it instantly
becomes a priority partner for many growing OEMs in Brazil keen to capture market
share in the local auto market and establish nationwide sales infrastructure. Automob
also sells 3% (a high % in such a fragmented market) of all Chinese cars sold in
Brazil.
Figure 24: Group of auto brands present in the portfolio of Simpar’s

Automon
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JSL
JSL is also heavily exposed to the auto industry. It is involved in new vehicle logistics,
like Tegma, and has intra-logistics and milk-run logistics contracts with many local
OEMs. Growth in Chinese OEMs' local output may thus offer contract opportunities Opportunities in intra-logistics, new vehicle
for JSL in internal logistics and other services. Much of Chinese players´ intra- logistics, and milk-run contracts
logistics demand will initially focus on the distribution of imported components
(container logistics). But as they gradually establish a local supplier chain, contracts
for milk-run parts distribution should become more common.
Chart 55: JSL exposure by sector Figure 25: Overview of JSL’s strong presence in auto
industry
Source: Company and BTG Pactual Source: Company and BTG Pactual
Figure 26: JSL's service portfolio in automotive industry
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Wilson Sons
As the port operator of the container terminal in Salvador, Wilson Sons stands to
benefit from the increasing trade volumes originating from China, including auto parts
and industrial components. BYD has been using another Chinese shipping line, Greater handled volume at its Salvador
Cosco, as its maritime logistics provider, facilitating the transport of industrial container port terminal
equipment for the new manufacturing operations. 45% of long-haul volumes in
Salvador originate from or are destined for Asia, predominantly China, so greater
Chinese investment should boost trade volume. If the terminal secures a direct
shipping line service to China, it could position Salvador as a major regional hub for
the Far-East trade route.
Figure 27: Overview of Tecon Salvador’s key positioning
Figure 28: Wilson Sons' breakdown of key contract in Salvador Terminal
Page 90
Disclosures
Required Disclosure
This report has been prepared by Banco BTG Pactual S.A.
The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.
Analyst Certificate
Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including
in relation to Banco BTG Pactual S.A. and/or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of
the securities discussed herein.
Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not
subject to the restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst
account.
Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by
Banco BTG Pactual S.A. and/or its affiliates.
Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first
name on the signature list.
Company Disclosures
7. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries, has received compensation for investment banking services from this company/entity.
8. Neither Banco BTG Pactual S.A, nor its affiliates or subsidiaries, expect to receive or intend to seek compensation for investment banking services and/or products and
services other than investment services from this company/entity within the next three months.
9. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided.
10. Banco BTG Pactual S.A. has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates or subsidiaries within
the past 12 months.
11. Banco BTG Pactual S.A. is not acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity, one of its
affiliates nor subsidiaries.
12. Directors or employees of Banco BTG Pactual S.A., its affiliates or subsidiaries are not directors of this company.
13. Directors or employees of Banco BTG Pactual S.A., its affiliates or subsidiaries do not take part on the board of directors of this company.
14. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or
more of any class of common equity securities.
15. Neither Banco BTG Pactual S.A., nor its affiliates or subsidiaries, including the funds, portfolios and investment clubs in securities managed by them, beneficially own directly
or indirectly 5% or more of a class of the subject company common equity.
16. Investment strategists have not contributed in the preparation of this company’s section. Investment strategists should not be considered as research analysts and are not
registered or qualified as such in their local market.
17. Banco BTG Pactual S.A., its affiliates or subsidiaries are market makers in the securities of this company.
Iochpe-Maxion MYPK3.SA Buy R$12.43/US$2.43 2024-04-28
Tupy TUPY3.SA Neutral R$26.32/US$5.14 2024-04-28
Tegma TGMA3.SA Buy R$24.56/US$4.80 2024-04-28
Mills MILS3.SA Buy R$13.47/US$2.63 2024-04-28
Frasle Mobility FRAS3.SA Buy R$17.96/US$3.51 2024-04-28
Localiza&Co RENT3.SA Buy R$50.50/US$9.87 2024-04-28
JSL JSLG3.SA Buy R$12.00/US$2.35 2024-04-28
Marcopolo POMO4.SA Buy R$6.96/US$1.36 2024-04-28
Vamos VAMO3.SA Buy R$7.25/US$1.42 2024-04-28
Randoncorp RAPT4.SA Buy R$11.00/US$2.15 2024-04-28
WEG WEGE3.SA Neutral R$39.22/US$7.67 2024-04-28
Movida MOVI3.SA Buy R$7.32/US$1.43 2024-04-28
Armac ARML3.SA Buy R$11.23/US$2.20 2024-04-28
Wilson Sons PORT3.SA Buy R$16.85/US$3.29 2024-04-28
Simpar SIMH3.SA Buy R$5.96/US$1.17 2024-04-28
Global Disclaimer
18.This report has been prepared by Banco BTG Pactual S.A. (“BTG Pactual S.A.”), a Brazilian regulated bank. BTG Pactual S.A. is the responsible for the distribution of this
report in Brazil. BTG Pactual US Capital LLC (“BTG Pactual US”), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial
Industry Regulatory Authority and the Securities Investor Protection Corporation is distributing this report in the United States. BTG Pactual US is an affiliate of BTG Pactual S.A.
BTG Pactual US assumes responsibility for this research for purposes of U.S. law. Any U.S. person receiving this report and wishing to effect any transaction in a security
discussed in this report should do so with BTG Pactual US at 212-293-4600, 601 Lexington Ave. 57th Floor, New York, NY 10022.
This report is being distributed in the United Kingdom by BTG Pactual (UK) Limited (“BTG Pactual UK”), which is authorized and regulated by the Financial Conduct Authority of
the United Kingdom. BTG Pactual UK has not: (i) produced this report, (ii) substantially altered its contents, (iii) changed the direction of the recommendation, or (iv) disseminated
this report prior to its issue by BTG Pactual S.A/BTG Pactual US. BTG Pactual UK does not distribute summaries of research produced by BTG Pactual S.A..
This report is being distributed in the EEA by BTG Pactual Portugal – Empresa de Investimentos S.A. (“BTG Pactual PT”), which is authorized and regulated by the Comissão do
Mercado de Valores Mobiliários (CMVM) of Portugal. BTG Pactual PT has not: (i) produced this report, (ii) substantially altered its contents, (iii) changed the direction of the
recommendation, or (iv) disseminated this report prior to its issue by BTG Pactual S.A/BTG Pactual US. BTG Pactual PT does not distribute summaries of research produced by
BTG Pactual S.A..
BTG Pactual Chile S.A. Corredores de Bolsa (“BTG Pactual Chile”), formerly known as Celfin Capital S.A. Corredores de Bolsa, is a Chilean broker dealer registered with
Comisión para el Mercado Financiero (CMF) in Chile and responsible for the distribution of this report in Chile and BTG Pactual Perú S.A. Sociedad Agente de Bolsa (“BTG
Pactual Peru”), formerly known as Celfin Capital S.A. Sociedad Agente e Bolsa, registered with Superintendencia de Mercado de Valores (SMV) de Peru is responsible for the
distribution of this report in Peru. BTG Pactual Chile and BTG Pactual Peru acquisition by BTG Pactual S.A. was approved by the Brazilian Central Bank on November 14th,
2012.
BTG Pactual S.A. Comisionista de Bolsa (“BTG Pactual Colombia”) formerly known as Bolsa y Renta S.A. Comisionista de Bolsa, is a Colombian broker dealer register with the
Page 91
Superintendencia Financeira de Colombia and is responsible for the distribution of this report in Colombia. BTG Pactual Colombia acquisition by BTG Pactual S.A. was approved
by Brazilian Central Bank on December 21st, 2012.
BTG Pactual Argentina is a broker dealer (Agente de Liquidación y Compensación y Agente de Negociación Integral) organized and regulated by Argentinean law, registered
with the Exchange Commission of Argentina (Comisión Nacional de Valores) under license Nro. 720 and responsible for the distribution of this report in Argentina. Additionally,
the Brazilian Central Bank approved the indirect controlling participation of Banco BTG Pactual S.A. in BTG Pactual Argentina on September 1st, 2017.
References herein to BTG Pactual include BTG Pactual S.A., BTG Pactual US Capital LLC, BTG Pactual UK, BTG Pactual Chile and BTG Pactual Peru and BTG Pactual
Colombia and BTG Pactual Argentina as applicable. This report is for distribution only under such circumstances as may be permitted by applicable law. This report is not
directed at you if BTG Pactual is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before
reading it that BTG Pactual is permitted to provide research material concerning investments to you under relevant legislation and regulations. Nothing in this report constitutes a
representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a
personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation, offer, invitation or
inducement to buy or sell any securities or related financial instruments in any jurisdiction. Prices in this report are believed to be reliable as of the date on which this report was
issued and are derived from one or more of the following: (i) sources as expressly specified alongside the relevant data; (ii) the quoted price on the main regulated market for the
security in question; (iii) other public sources believed to be reliable; or (iv) BTG Pactual's proprietary data or data available to BTG Pactual. All other information herein is
believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either
express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning Banco
BTG Pactual S.A., its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. In
all cases, investors should conduct their own investigation and analysis of such information before taking or omitting to take any action in relation to securities or markets that are
analyzed in this report. BTG Pactual does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any
investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. BTG Pactual accepts no fiduciary duties to recipients
of this report and in communicating this report is not acting in a fiduciary capacity. The report should not be regarded by recipients as a substitute for the exercise of their own
judgment. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on
which the report was issued and are therefore subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of BTG
Pactual as a result of using different assumptions and criteria. Because the personal views of analysts may differ from one another, Banco BTG Pactual S.A., its subsidiaries and
affiliates may have issued or may issue reports that are inconsistent with, and/or reach different conclusions from, the information presented herein. Any such opinions,
estimates, and projections must not be construed as a representation that the matters referred to therein will occur. Prices and availability of financial instruments are indicative
only and subject to change without notice. Research will initiate, update and cease coverage solely at the discretion of BTG Pactual Investment Bank Research Management.
The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation
of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information.
BTG Pactual is under no obligation to update or keep current the information contained herein, except when terminating coverage of the companies discussed in the report. BTG
Pactual relies on information barriers to control the flow of information contained in one or more areas within BTG Pactual, into other areas, units, groups or affiliates of BTG
Pactual. The compensation of the analyst who prepared this report is determined by research management and senior management (not including investment banking). Analyst
compensation is not based on investment banking revenues, however, compensation may relate to the revenues of BTG Pactual Investment Bank as a whole, of which
investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options,
derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high
degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results.
If a financial instrument is denominated in a currency other than an investor’s currency, a change in rates of exchange may adversely affect the value or price of or the income
derived from any security or related instrument mentioned in this report, and the reader of this report assumes any currency risk. This report does not take into account the
investment objectives, financial situation or particular needs of any particular investor. Investors should obtain independent financial advice based on their own particular
circumstances before making an investment decision on the basis of the information contained herein. For investment advice, trade execution or other enquiries, clients should
contact their local sales representative. Neither BTG Pactual nor any of its affiliates, nor any of their respective directors, employees or agents, accepts any liability for any loss or
damage arising out of the use of all or any part of this report. Notwithstanding any other statement in this report, BTG Pactual UK does not seek to exclude or restrict any duty or
liability that it may have to a client under the “regulatory system” in the UK (as such term is defined in the rules of the Financial Conduct Authority). Any prices stated in this report
are for information purposes only and do not represent valuations for individual securities or other instruments. There is no representation that any transaction can or could have
been effected at those prices and any prices do not necessarily reflect BTG Pactual internal books and records or theoretical model-based valuations and may be based on
certain assumptions. Different assumptions, by BTG Pactual S.A., BTG Pactual US, BTG Pactual UK, BTG Pactual Chile and BTG Pactual Peru and BTG Pactual Colombia and
BTG Pactual Argentina or any other source, may yield substantially different results. This report may not be reproduced or redistributed to any other person, in whole or in part,
for any purpose, without the prior written consent of BTG Pactual and BTG Pactual accepts no liability whatsoever for the actions of third parties in this respect. Additional
information relating to the financial instruments discussed in this report is available upon request. BTG Pactual and its affiliates have in place arrangements to manage conflicts
of interest that may arise between them and their respective clients and among their different clients. BTG Pactual and its affiliates are involved in a full range of financial and
related services including banking, investment banking and the provision of investment services. As such, any of BTG Pactual or its affiliates may have a material interest or a
conflict of interest in any services provided to clients by BTG Pactual or such affiliate. Business areas within BTG Pactual and among its affiliates operate independently of each
other and restrict access by the particular individual(s) responsible for handling client affairs to certain areas of information where this is necessary in order to manage conflicts of
interest or material interests. Any of BTG Pactual and its affiliates may: (a) have disclosed this report to companies that are analyzed herein and subsequently amended this
report prior to publication; (b) give investment advice or provide other services to another person about or concerning any securities that are discussed in this report, which
advice may not necessarily be consistent with or similar to the information in this report; (c) trade (or have traded) for its own account (or for or on behalf of clients), have either a
long or short position in the securities that are discussed in this report (and may buy or sell such securities), with the securities that are discussed in this report; and/or (d) buy
and sell units in a collective investment scheme where it is the trustee or operator (or an adviser) to the scheme, which units may reference securities that are discussed in this
report.
United Kingdom: Where this report is disseminated in the United by BTG Pactual UK, this report is is directed by BTG Pactual UK at, those who are the intended recipients of this
report. This report has been classified as investment research and should not be considered a form of advertisement or financial promotion under the provisions of FSMA 2000
(Sect. 21(8)).This communication may constitute an investment recommendation under the Market Abuse Regulation 2016 (“MAR”) and, as required by MAR, the investment
recommendations of BTG Pactual personnel over the past 12 months can be found by clicking on https://www.btgpactual.com/research/. Please also consult our website for all
relevant disclosures of conflicts of interests relating to instruments covered by this report. While all reasonable effort has been made to ensure that the information contained is
not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness, and it should not be relied upon as such. Past performances
offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context and which is subject to change without notice.
EEA: Where this report is disseminated in the selected countries in the EEA by BTG Pactual PT, this report is issued by BTG Pactual PT only to, and is directed by BTG Pactual
PT at, those who are the intended recipients of this report. This report has been classified as investment research and should not be considered a form of advertisement or
marketing material under the provisions of Mifid II.This communication may constitute an investment recommendation under the Market Abuse Regulation 2016 (“MAR”) and, as
required by MAR, the investment recommendations of BTG Pactual personnel over the past 12 months can be found by clicking on https://www.btgpactual.com/research/.
Please also consult our website for all relevant disclosures of conflicts of interests relating to instruments covered by this report. While all reasonable effort has been made to
ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness, and it should not be
relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context and which is
subject to change without notice.
Dubai: This research report does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment
products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Furthermore, this information is being made available
on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the
UAE Central Bank, Emirates Securities and Commodities Authority or the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in
the UAE. The content of this report has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.
United Arab Emirates Residents: This research report, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in
the United Arab Emirates and accordingly should not be construed as such. The securities are only being offered to a limited number of sophisticated investors in the UAE who
(a) are willing and able to conduct an independent investigation of the risks involved in an investment in such securities, and (b) upon their specific request. The securities have
not been approved by or licensed or registered with the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the UAE. This research report
is for the use of the named addressee only and should not be given or shown to any other person (other than employees, agents or consultants in connection with the
addressee's consideration thereof). No transaction will be concluded in the UAE and any enquiries regarding the securities should be made with BTG Pactual CTVM S.A. at +55
11 3383-2638, Avenida Brigadeiro Faria Lima, 3477, 14th floor, São Paulo, SP, Brazil, 04538-133.
Page 92
Statement of Risk
Armac. [BRARML] - Armac is subject to local macroeconomic conditions. Negative economic dynamics such as weak GDP
growth, an inflation spike and a hike in interest rates could hurt results. Company-specific risks include cost of growth, execution strategies and faster-than-expected entry of new
competitors.
Frasle Mobility. [BRFRAS] - Main downside risks are (1) lower than expected GDP growth in Brazil; (2) lower than expected auto sector credit availability; (3) competition from
imports or international players; (4) potential M&A execution (5) flight to liquidity, as average daily trading volume is limited.
Iochpe-Maxion. [BRMYPK] - Main downside risks are (1) lower than expected GDP growth in Brazil; (2) lower than expected auto sector credit availability; (3) competition from
imports or international players; (4) potential M&A execution (5) flight to liquidity, as average daily trading volume is limited; Main upside risks are (1) stronger than expected
economic activity and infrastructure deployement; (2) government incentives to the auto sector; (3) M&A and international expansion.
JSL. [BRJSLG] - JSL SA is exposed to macroeconomic and regulatory risk in Brazil. Its business depends on regulation for growth and the company usually leverages its
projects significantly to capture maximum shareholder value.
Localiza&Co. [BRRENT] - Localiza is subject to local macroeconomic conditions. Negative economic dynamics such as weak GDP growth, an inflation spike and a hike in
interest rates could hurt results. Company-specific risks include cost of growth and execution strategies.
Marcopolo. [BRPOMO] - Main downside risks are (1) lower than expected GDP growth in Brazil; (2) lower than expected auto sector credit availability; (3) competition from
Mills. [BRMILL] - There are potential risks inherent in the infrastructure sector, including, but not limited to, the volatile nature of investments, which may differ materially from
expectations. Moreover, the sector is exposed to political, financial, and operational risks, each of which has the potential to significantly affect the company/industry
performance. Any investment in Latin American equities, including this stock, is subject to exchange rate risk, as well as unexpected fluctuations in the local economy.
Movida. [BRMOVI] - Movida is subject to local macroeconomic conditions. Negative economic dynamics such as weak GDP growth, an inflation spike and a hike in interest rates
could hurt results. Company-specific risks include cost of growth and execution strategies.
Randoncorp. [BRRAPT] - Main downside risks are (1) lower than expected GDP growth in Brazil; (2) lower than expected auto sector credit availability; (3) competition from
Simpar. [BRSIMH] - Simpar SA is exposed to macroeconomic and regulatory risk in Brazil. Its business depends on regulation for growth and the company usually leverages its
projects significantly to capture maximum shareholder value.
Tegma. [BRTGMA] - Main downside risks are (1) lower than expected GDP growth in Brazil; (2) lower than expected auto sector credit availability; (3) potential M&A execution
(5) flight to liquidity, as average daily trading volume is limited; Main upside risks are (1) stronger than expected economic activity and infrastructure deployement; (2) government
incentives to the auto sector; (3) M&A.
Tupy. [BRTUPY] - Main downside risks are (1) lower than expected GDP growth (especially in Americas); (2) lower than expected auto sector credit availability (mainly in Brazil);
(3) change trend to aluminum-based engine blocks; (4) client concentration; Main upside risks are (1) stronger than expected economic activity and infrastructure deployment; (2)
more government incentives for the auto sector; (3) potential synergies on Mexican assets.
Vamos. [BRVAMO] - Vamos is subject to local macroeconomic conditions. Negative economic dynamics such as weak GDP growth, an inflation spike and a hike in interest rates
could hurt results. Company-specific risks include cost of growth, execution strategies and faster-than-expected entry of new competitors.
WEG. [BRWEGE] - Downside risks include (1) significant commodity price volatility, which could jeopardize margins until achieving full pass through; (2) technical and
managerial personnel shortage delaying international expansion; and (3) a continuous deterioration of global industrial production output, leading to a stiffer competitive scenario.
Upside risks include (1) a faster ramp up of investments in production facilities, driving higher margins; (2) significant market share gains, offsetting a pale global growth scenario;
and (3) continuous international expansion, either via local agreements and selective M&A.
Wilson Sons. [BRWSON] - Wilson Sons has the rights to operate the Rio Grande and Salvador container terminals through 2047 and 2050, respectively (exercing its option to
renew for another 25 years subject to mutual agreement). Increasingly competition in the towage industry can damage capacity to pass through costs and reduce ability to
maintain profitable margins. Lower oil prices may reduce exploration capacity and drive a drop in demand for offshore services. Logistics and ship agency divisions are subject to
the risk of large new-comers building offices in Brazil, thus benefiting from a larger franchise and economies of scale.
Valuation Methodology
Armac. [BRARML] - Our 12-month forward target price is DCF-driven.
Frasle Mobility. [BRFRAS] - Our 12-month forward target price is DCF-driven.
Iochpe-Maxion. [BRMYPK] - Our 12-month forward target price is DCF-driven.
JSL. [BRJSLG] - Our 12-month forward target price is DCF-driven.
Localiza&Co. [BRRENT] - Our 12-month forward target price is DCF-driven.
Marcopolo. [BRPOMO] - Our 12-month forward target price is DCF-driven.
Mills. [BRMILL] - Our 12-month forward target price is DCF-driven.
Movida. [BRMOVI] - Our 12-month forward target price is DCF-driven.
Randoncorp. [BRRAPT] - Our 12-month forward target price is DCF-driven.
Simpar. [BRSIMH] - Our 12-month forward target price is DCF-driven and a Sum-of-the-Parts (SOTP) calculation.
Tegma. [BRTGMA] - Our 12-month forward target price is DCF-driven.
Tupy. [BRTUPY] - Our 12-month forward target price is DCF-driven.
Vamos. [BRVAMO] - Our 12-month forward target price is DCF-driven.
WEG. [BRWEGE] - Our 12-month forward target price is DCF-driven.
Wilson Sons. [BRWSON] - Our 12-month forward target price is DCF-driven.
Colombia and BTG Pactual Argentina or any other source, may yield substantially different results. This report may not be reproduced or redistributed to any other person, in
whole or in part, for any purpose, without the prior written consent of BTG Pactual and BTG Pactual accepts no liability whatsoever for the actions of third parties in this respect.
Additional information relating to the financial instruments discussed in this report is available upon request. BTG Pactual and its affiliates have in place arrangements to manage
conflicts of interest that may arise between them and their respective clients and among their different clients. BTG Pactual and its affiliates are involved in a full range of financial
and related services including banking, investment banking and the provision of investment services. As such, any of BTG Pactual or its affiliates may have a material interest or
a conflict of interest in any services provided to clients by BTG Pactual or such affiliate. Business areas within BTG Pactual and among its affiliates operate independently of
each other and restrict access by the particular individual(s) responsible for handling client affairs to certain areas of information where this is necessary in order to manage
conflicts of interest or material interests. Any of BTG Pactual and its affiliates may: (a) have disclosed this report to companies that are analyzed herein and subsequently
amended this report prior to publication; (b) give investment advice or provide other services to another person about or concerning any securities that are discussed in this
report, which advice may not necessarily be consistent with or similar to the information in this report; (c) trade (or have traded) for its own account (or for or on behalf of clients),
have either a long or short position in the securities that are discussed in this report (and may buy or sell such securities), with the securities that are discussed in this report;
and/or (d) buy and sell units in a collective investment scheme where it is the trustee or operator (or an adviser) to the scheme, which units may reference securities that are
discussed in this report.
United Kingdom: Where this report is disseminated in the United by BTG Pactual UK, this report is is directed by BTG Pactual UK at, those who are the intended recipients of this
report. This report has been classified as investment research and should not be considered a form of advertisement or financial promotion under the provisions of FSMA 2000
(Sect. 21(8)).This communication may constitute an investment recommendation under the Market Abuse Regulation 2016 (“MAR”) and, as required by MAR, the investment
recommendations of BTG Pactual personnel over the past 12 months can be found by clicking on https://www.btgpactual.com/research/. Please also consult our website for all
relevant disclosures of conflicts of interests relating to instruments covered by this report. While all reasonable effort has been made to ensure that the information
Page 93
contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness, and it should not be relied upon as such. Past
performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context and which is subject to change without
notice.
EEA: Where this report is disseminated in the selected countries in the EEA by BTG Pactual PT, this report is issued by BTG Pactual PT only to, and is directed by BTG Pactual
PT at, those who are the intended recipients of this report. This report has been classified as investment research and should not be considered a form of advertisement or
marketing material under the provisions of Mifid II.This communication may constitute an investment recommendation under the Market Abuse Regulation 2016 (“MAR”) and, as
required by MAR, the investment recommendations of BTG Pactual personnel over the past 12 months can be found by clicking on https://www.btgpactual.com/research/.
Please also consult our website for all relevant disclosures of conflicts of interests relating to instruments covered by this report. While all reasonable effort has been made to
ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness, and it should not be
relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context and which is
subject to change without notice.
Dubai: This research report does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment
products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Furthermore, this information is being made available
on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the
UAE Central Bank, Emirates Securities and Commodities Authority or the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in
the UAE. The content of this report has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.
United Arab Emirates Residents: This research report, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in
the United Arab Emirates and accordingly should not be construed as such. The securities are only being offered to a limited number of sophisticated investors in the UAE who
(a) are willing and able to conduct an independent investigation of the risks involved in an investment in such securities, and (b) upon their specific request. The securities have
not been approved by or licensed or registered with the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the UAE. This research report
is for the use of the named addressee only and should not be given or shown to any other person (other than employees, agents or consultants in connection with the
addressee's consideration thereof). No transaction will be concluded in the UAE and any enquiries regarding the securities should be made with BTG Pactual CTVM S.A. at +55
11 3383-2638, Avenida Brigadeiro Faria Lima, 3477, 14th floor, São Paulo, SP, Brazil, 04538-133.
Page 94

Thematic Report - Chinese Cars in Brazil - The Year of The Dragon

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Thematic Report - Chinese Cars in Brazil - The Year of The Dragon

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BTG Pactual Affiliate Research

Banco BTG Pactual S.A.

From exporting deflation to becoming local producers

Electrification trend gains a powerful ally

Trying to assess the key consequences for our coverage

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 91

In sections 13-15, we explore the different distribution strategies adopted by Chinese

Transportation & Capital Goods Team

Part 1 - The rise of Chinese OEMs in Brazil Page 5

1 Section 1. Introduction Page 5

2 Section 2. The anatomy of a market change Page 9

3 Section 3. Recap of OEMs entering the Brazilian market Page 12

4 Section 4. First Chinese ventures in Brazil Page 16

5 Section 5. Specific features of the Chinese success Page 18

6 Section 6. Global benchmarking – what happened in other countries? Page 21

7 Section 7. From importers to producers Page 26

8 Section 8. Other investments in the region Page 31

9 Section 9. A key factor this time: electric vehicles (EVs) Page 33

10 Section 10. A brief review of automotive electrification in Brazil Page 37

11 Section 11. The discussion on import tax Page 40

12 Section 12. A quick look at Brazil’s charging infrastructure Page 42

13 Section 13. Distribution strategy Page 45

14 Section 14. Side-effects – lower prices Page 47

15 Section 15. Residual value risk management Page 51

16 Section 16. Forecasting Chinese EV growth in Brazil Page 55

17 Section 17. Is electrification really the best solution? Page 57

Part 2 – Read across for our coverage Page 60

1 Capital Goods Page 61

3 Randoncorp & Frasle Mobility Page 67

1 Car rentals (Localiza&Co and Movida) Page 72

2 Machine rental companies (Armac, Mills and Vamos) Page 85

6 Wilson Sons Page 90

Part 1 - The rise of Chinese OEMs in Brazil

A new contender emerges

Chart 3: Share of Chinese Imports in Brazil's Electric Car Market

Source: ANFAVEA and BTG Pactual

Figure 1: Chinese vehicle portfolio in Brazil (main vehicles)

Source: Fenabrave and BTG Pactual

Challenges and opportunities

Figure 2: Main challenges faced by Chinese OEMs in Brazil

Source: BTG Pactual

Shaping the future of mobility

Figure 3: Main advantages of Chinese OEMs in Brazil

Source: BTG Pactual

Section 2. The anatomy of a market change

Chart 4: Vehicle imports in Brazil, by country of origin

Source: ANFAVEA and BTG Pactual

Chart 5: Historical evolution of the share of imported vehicles

Source: ANFAVEA and BTG Pactual

Chart 6: Historical evolution of sales of imported vehicles ('000 units)

Source: ANFAVEA and BTG Pactual

Chinese automotive behemoth BYD, the world's largest EV manufacturer, plans to

Chart 7: Sales of new energy vehicles by type of technology in Brazil (units)

Source: ANFAVEA and BTG Pactual

Chart 8: Share of EVs in total light vehicle market in Brazil

Source: ANFAVEA and BTG Pactual

EV sales: Hybrid and electric vehicles reached a record 7.9% of domestic

Table 1: OEMs' market share in automotive sales in Brazil

Source: Fenabrave and BTG Pactual

Section 3. Recap of OEMs entering the Brazilian market

Federal government launched a new automotive program called Mover

Mover: A brief snapshot

From “well to wheel”