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People often associate Brazil with World Cup soccer and beautiful sunny beaches, but not commercial aircraft manufacturing. But Brazil is one of the world’s leading manufacturers of small commercial jets, with offices in Australia, China, France, Singapore, and the United States and an order backlog totaling $11 billion. The company that achieved this status is Embraer (Empresa Brasileira de Aeronáutica S.A.). While Embraer may not be a household word in many parts of the world, most airline passengers in North and South America, Europe, and much of Asia have probably flown on one of their planes at one time or another. In the United States, for example, Embraer, along with Canadian rival Bombardier, jointly controls most of the market for regional jets. Embraer was established in 1969 by the Brazilian government to provide the country with its own aircraft-manufacturing capability. But government sponsorship did not ensure success, and by 1994 the company had lost more than $300 million. Privatization was the only way to avoid bankruptcy. Since then, Embraer has transformed itself from a near-bankrupt state-run enterprise into one of Brazil’s leading export companies and the world’s fourth largest aircraft manufacturer after Airbus, Boeing, and Bombardier. This impressive turnaround is credited to its smart strategic positioning. While Airbus and Boeing invested heavily in larger aircraft, Embraer focused on the small commercial jet market, initially targeting regional carriers, such as American Eagle, United Express, Luxair, and British Midland. These regional jets (ERJ 135, 140, and 145 series) seated between thirty and fifty passengers. But beginning in 1999, Embraer launched a new and larger family of commercial jet aircraft with seating capacities ranging from seventy to one hundred passengers (Embraer 175, 190, and 195 series). Advanced engineering, superior operating efficiency, spacious cabins, and competitive prices characterize the newer planes. This new series placed the Brazilian company in a head-to-head competition with both Airbus’s A318 and Boeing’s 717 (formerly the DC9) for mainline carriers such as Air Canada, US Airways, Jet Blue, Finnair, and Continental. As Mauricio Botelho, Embraer’s president and the chief architect of its turnaround, explained,
Some of the mainline carriers are focused on the 100-seater, while the regional airliners are focused on the 70-seaters. What is interesting is the expansion of the regional airlines and downsizing of the mainline carriers. [The Embraer 190 and 195] are perfect for this market. They are not regional jets; they are big aircraft. Look at it in terms of the comfort they provide, the seating, the cabin height, the baggage compartment, and the performance. This is much more compatible with mainline airline requirements than what is known today as a regional jet. When you see the regional airlines growing their fleets to 70-seat aircraft and the major carriers coming down to 100-seat aircraft, and the level of comfort expected by passengers, this is the perfect aircraft.20 As one of Brazil’s leading export companies, Embraer has as its principal business strategy the building of aircraft in Brazil for export to other countries. In this way, Embraer maintains tight control over both technology and quality control. In late 2002, however, the company decided to increase its international presence by building a factory in China. To accomplish this, Embraer committed $25 million and formed a joint venture with the state-run China Aviation Industry Corporation II, or AVIC II. The new joint venture, Harbin Embraer Aircraft Industry, is controlled by Embraer, which holds a 51 percent stake in the new company, with the remaining 49 percent held by AVIC II. Chinese leaders were quick to endorse the new venture. Guan Dongyuan observed, “Embraer sees the strengthening of air transportation in China as a key component of the country’s development, and the Harbin assembly line is a clear sign of our long-term commitment to the progress of the Chinese aeronautical industry. . . . The establishment of the Harbin Embraer facility places Embraer in a privileged position to serve Chinese operator customers.”21 Harbin Embraer began production in 2003, producing one ERJ 145 aircraft per month, but with plans to double production shortly. The company believes that the Chinese aviation market will grow substantially and has a capacity to absorb about three hundred aircraft in the coming ten years. Its 258,000-square-foot production facility in Harbin employs 220 Chinese employees; only 15 Brazilians were expatriated to China to work on the venture.22 Eventually, Harbin Embraer plans to manufacture the larger 170/190 series of jet aircraft. The joint venture in China was a landmark for Embraer—its first offshore manufacturing facility. But company president Botelho said the company has no interest in establishing additional joint ventures in Asia. “The joint venture model only applies to China. We will continue to export Brazilian-made aircraft to the other countries in Asia,” he noted.23 Even so, offshore facilities will be built elsewhere. In 2003, Embraer formed an alliance with Lockheed Martin of the United States to build next-generation surveillance planes for the U.S. Army. Then, in August 2004, Embraer closed a deal to sell ERJ 145 jets to the U.S. military for use in battle camps. The initial contract is worth $879 million but may eventually reach $7 billion. As part of the contract, Embraer announced plans to construct a major new facility in Jacksonville, Florida, to manufacture the aircraft.
Based on what you have learned, answer the following questions:
1. What business strategy does Embraer follow? Do you agree with this strategy? Why or why not?
2. Traditionally, Embraer has relied on exports from Brazil as a mode of entry into foreign markets. However, when entering the Chinese market the company chose to use a joint venture. Why do you believe it decided to establish a joint venture in China rather than simply exporting planes from Brazil? What are the advantages and disadvantages of each? Why do you believe Embraer chose not go solo and establish an Embraer subsidiary in China?
3. Embraer’s Mauricio Botelho said the joint-venture model would apply exclusively to China; other Asian aircraft markets would be served from Brazil. What is the logic behind this statement? What makes China different from other Asian markets?
4. In view of the technological and manufacturing strength of the U.S. aircraft industry, why do you think the U.S. military contracted to buy planes from a Brazilian firm?
5. As a strategy consultant to Embraer, where would you advise Embraer to move next? Explain your choice.