Chinese govt to decide on future for Harbin Embraer: Curado

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Embraer is waiting for the Chinese government to decide on its proposal to assemble E-Jets at its Chinese joint venture plant or begin the process of shuttering the facility.

The Brazilian manufacturer earlier this month said a decision needs to be made by August on whether to close Harbin Embraer, which currently assembles ERJ-145s, or transition to E-190s. Embraer CEO Frederico Curado tells ATI "the ball is pretty much in their court", referring to the Chinese government.

The Chinese government owns AVIC, which has a 49% stake in Harbin Embraer. Government approval is also required for any new aerospace project.

"We presented the project," Curado said during a recent interview at Embraer's Sao Jose dos Campos headquarters. "[So far] there's no reaction. They are just evaluating it. We are just waiting."

Curado says Harbin Embraer's last ERJ-145 is now scheduled to be completed in the second quarter of 2011. He says a decision needs to be made "within the next few months" on whether to close Harbin Embraer or use the factory for a new product given the lead times required to prepare for the latter.

"We clearly have to make a decision to go with another product or if we don't I think it's very unlikely there will be further orders for the 145, therefore we may be forced to wind down industrial activities," Curado explains.

He estimates it would take 12 to 18 months to have an E-190 assembly line "up and running" at Harbin. As a result, even if the Chinese government approves the E-Jet project, there would be a gap between the end of the ERJ-145 line and the start of the E-Jet line.

Curado says "a little hiatus" would be "fine" but stresses: "What we won't do is sit and wait for years. That we can't do. It's unacceptable business."

He says the Chinese government and AVIC are well aware that a decision needs to be made sooner rather than later because AVIC has seats on Harbin Embraer's board. "They know we don't have much time. Lead times are lead times. If we are to invest in new equipment, tooling etc for the E-190 we need to decide not very long from now," Curado says.

He adds: "Both sides know we don't have much time. The hard date is the construction of the last 145 which is roughly a year from today."

Curado says there are no other options for Harbin Embraer except to assemble E-Jets. There is not enough of a market in Asia to justify assembling corporate jets at Harbin and the facility lacks the machines required to produce aircraft components. Curado says aircraft components are now produced "across the street" in Harbin at a fully-owned AVIC facility, and if Harbin Embraer closes there will be no impact on any of the AVIC subsidiaries which supply Embraer in Brazil.

Curado says Harbin could theoretically assemble all four members of the E-Jet family and "we haven't come to a final partnership discussion on" whether to go with the E-190/195 and/or the E-170/175. But Curado says the E-190/195 is a "more likely" option than the E-170/175, pointing out Embraer is planning to deliver this year more than 12 E-190s to Chinese carriers.

He acknowledges higher tax rates on the E-170/175 have partly contributed to Embraer's lack of success in exporting E-170/175s to China. But he says even if the tax rate was the same for all members of the E-Jet family he believes the E-190/195 is a better fit for the Chinese market.

To protect its budding indigenous aerospace industry, China for several years has levied a higher tax on smaller commercial aircraft. The higher tax rate is based on weight, with the E-190 just missing the higher tax and in the same category as all members of the Airbus A320 and Boeing 737 families.

The tax has been viewed mainly as a measure to protect sales of the ARJ21, which has been developed by AVIC subsidiary Comac. Embraer was able to get around this tax for the ERJ-145 by opening an assembly line in Harbin in 2003. At the time the E-170 was not seen as an option for Harbin politically because the E-170 is in the same size category as the ARJ21.

Some industry experts believe the Chinese government could reject the proposal to assemble E-190s at Harbin to further protect potential sales of the ARJ21. But Curado says he does not know of any policy in place - either direct or indirect - to protect the ARJ21. "It's not that clear. It was never said that way to us," he says. "Anything in China needs to be approved. That's really a question for them."