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Red tape slows entry into Latin America

Published December 2, 2011

Editor's note: The following article appears in the December issue of Bicycle Retailer & Industry News. To subscribe to the magazine, click on the link at the upper right.

By Nicole Formosa

SAO PAULO, Brazil—Ask a few industry executives for their take on the Latin American market and the same words come up: challenging, complicated, changing, opportunity.

The potential is there, they say, but barriers to entry cloud a clear path to consumers. Strategy sessions on how to tackle differing import duties, customs regulations, distributor selection and time-consuming shipping and delivery logistics often result in head scratching and telephone calls to colleagues in search of a formula to crack the code.

“Everybody’s kind of tapping the outside glass trying to see where they need to go in and where to do it, but very few are making a big giant splash,” said Chip Barbieri, managing director of DT Swiss for the Americas.

But it’s also a region international brands can’t afford to ignore. As companies look to the future, recognizing there’s only so much room for growth left in the maturing North American and European markets, Central and South American countries are increasingly appealing.

In Brazil—the top Latin American bicycle market in terms of volume—the poverty rate has gone down by half in the past two decades and the nation’s economy is forecast to grow 3.6 percent this year. According to the Economist Intelligence Unit, this year Brazil will overcome Britain as the sixth-largest economy in the world.

With middle-class incomes rising, bike ownership is slowly shifting from a necessity for those who can’t afford cars to a sign of wealth. Cycling path networks, bike share programs and car-free days are cropping up in Mexico City; Bogotá, Colombia; and Buenos Aires, Argentina, further propelling recreational use of bicycles.

“As people become more affluent they tend to go to global brands, and that’s where global brands have advantages,” said Maureen Muldoon, director of international sales for Trek, which recently opened its own subsidiary in Mexico, where import duties on Chinese-made 700c bikes will drop to 15 percent in 2012, compared with 123 percent just two years ago.

Shimano recognized the necessity of opening an office in South America five years ago when it sent Fabio Takayanagi to São Paulo, Brazil, to lead the charge. Since then, the Japanese component manufacturer has opened a second office in Buenos Aires and now staffs 30 people between the two locations to cover all of Central and South America. Shimano supplies low-end parts to domestic manufacturers in Brazil and Argentina, so being closer to OEMs made sense. But now it’s also seeing its aftermarket business grow as consumers demand higher-quality products.

“Really the market is changing and there are much more people enjoying bicycles as leisure, as a way of having a healthier lifestyle than before,” said Takayanagi, who has also worked for Shimano in Japan and Europe.

He has not only witnessed the change, but also has seen the industry gradually catch on, noting the presence of nearly all the significant American and European bike brands at October’s Bike Expo Brazil show in São Paulo. Next year, Brazil’s largest city will host a second trade show, the Brazil Cycle Fair, hosted by the national industry association, to support the growing business.

Growth, however, means growing pains.

The most sought-after markets, Brazil and Argentina, are also the most difficult to penetrate, with high import duties and fierce government protection for domestic manufacturing. In Brazil, the government recently upped duties on complete bikes from 20 percent to 35 percent to protect such manufacturers as Caloi, Prince Bike, Monark and CBB from competition with Chinese imports. Tire duties rose from 16 percent to 35 percent. The government is also flirting with the idea of raising the Duty for Industrialized Product, and instituting potentially costly testing requirements for imported adult bikes that would add another level of red tape for non-domestic brands.

This frustrates Paulo Serena, who runs Fepase Sportcycle in São Paulo, distributor for brands including KHS, Hayes Bicycle Group, Lazer and Exustar to about 300 specialty retailers in Brazil.

He is among those lobbying the government to level the playing field, perhaps dropping or reducing duties on imports with FOB value more than $200, which don’t compete with domestic brands that already command 97 percent of the market.

“What we cannot understand is why our government increases prices for a bicycle profile that Brazilian manufacturers are not able to manufacture,” Serena said. “Brands like KHS, Specialized, Trek, Cannondale, Kona, Scott and others represent no more than 3 percent of the total volume of bicycles sold in Brazil.”

In Argentina, the situation is equally sticky. In addition to import duties, there is a complicated set of rules that require a special license to import. DT Swiss’ Barbieri learned this firsthand when he attempted to ship low-end spokes to a new distributor there. Two months later—after helping the distributor fill out 20 pages of customs documents and getting a basic country-of-origin certificate signed by the local Chamber of Commerce in Colorado and having it notarized and sent to the Argentine consulate in Texas—the shipment was finally approved.

“Once you ship it, you hope the money’s coming back. Some of these guys prepay. That protects us, but it doesn’t make it easy for us to grow the business and that’s tough for them to do. I think that’s what’s stopping all of us from seeing more of us down there in a big way,” Barbieri said.

Barbieri understands the flip side too. Without a service center closer to South America, if a fork or shocks needs service or warranty, a distributor has to pay taxes on it again at full value when the repaired item is returned.

“By the time they get it back it’s almost as expensive to them as buying a new one and bringing it in,” he said. DT Swiss is considering setting up a service center in South America as more of its products are spec’d on bikes sold there, but figuring out which country makes the most financial sense given the lack of free trade between borders is another challenge.

This restrictive trade landscape has opened the door to gray-market products purchased stateside or sold into the country over the Internet by U.S. retailers, mucking up the market even more. When U.S. bike retail was suffering in late 2008 and 2009, it was cheaper for a Latin American dealer to fly to Miami, buy a couple high-end bikes and resell them in their stores for a profit than to purchase them through a local distributor that had to factor high import duties into their wholesale prices.

The Brazilian government is fighting against this by implementing a program that requires electronic invoices to be filed by shops for all sales, and penalizing shops that skirt the rules. That’s already making a big impact, said Takayanagi, and represents a sea change from previously informal enforcements.

All this has those charged with building new markets wondering if the costs associated with setting up operations in Latin America will pay off or hit a dead end, especially given the dearth of market statistics to help validate the investment. Some countries, such as Chile and Colombia, are friendlier to international commerce, but the potential cycling markets are not as large. Trek’s Muldoon likened researching other countries to “belly rubbing and using a Ouija board” and said frequent visits are really the only way to get and keep a pulse on business.

Luke Musselman, Hayes Bicycle Group’s aftermarket sales manager for the Americas, recently wrapped up a two-week “crash course” on the Brazilian market, and returned with a far greater knowledge about what consumers are riding, the dominant players and retail competition—all pointing to how critical it is for Hayes to be present in Latin America despite the uncertainty.

“In South America, there’s huge, huge potential and the foundation is just being laid,” he said.

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