By Murdo Morrison and Helen Massy- Beresford
Thanks to Embraer, Brazil has become a major player in aerospace. In this special feature, we examine the challenges facing the country's champion as a new chief executive takes over from the iconic Mauricio Botelho. We also look at the growth of Brazil's SMEs, the outlook for defence spending, and the airline sector after Varig's demise
In a little over a decade, Mauricio Botelho has transformed Brazil's Embraer from a sleepy, state-owned manufacturer with ambitions in the emerging regional airline market to a global aerospace powerhouse. After veering close to bankruptcy in the early 1990s, the company he next week hands over to his chosen successor as chief executive, Fred Curado, is the number one in regional jets and a growing player in the burgeoning business aviation market. In defence, it has shifted emphasis from being a prime or key partner in a tiny domestic market to a regional heavyweight and supplier of platforms to the global domestic security and government market.
Embraer has built its reputation on not throwing what little money it has had around. Since cutting loose from state ownership in 1994, it has cannily broken into new markets by developing low-risk variants of existing platforms - such as the Legacy 600 business aircraft based on the ERJ-135 regional jet and military surveillance aircraft developed from its ERJ-145. When it has developed all-new products, such as the $1 billion investment in the Embraer 170 and 190 family of large regional jets, or the Phenom 100 and 300 very light and light jets, it has come in at the right time to exploit a burgeoning new market.
This year, Embraer will introduce a seven-day, three-shift system for the first time at its main São José dos Campos factory near São Paulo as it gears up to produce more than 200 aircraft this year - with production of its E-170/190 family rising from the current 11 to 18 a month by 2008 - with around 30 Legacy business jets a year on top of that. Assembly of the Phenom 100 very light jet starts next year, with the larger Phenom 300 coming off the line in 2009 - combined orders for the small business jets stand at around 355. The company will take on 3,000 new employees, hugely significant in a country with a handful of high-tech industries and massive poverty.
Regional aircraft manufacturing has been at the core of Embraer's success
For someone so closely identified with Embraer's success, Botelho, who joined the company just after privatisation in 1995, is aware that his stepping down as chief executive could cause jitters among investors, a much wider community than previously after the company's capital restructuring in March 2006. Embraer has carefully managed the transition, with Botelho and Curado spending much of the past few months travelling the world to talk to key customers, partners and financial institutions. "A succession is one of the most dangerous things that can happen to a company, but I think we have clearly established to the market that there are competent people taking the helm," says Botelho, who stays on as chairman until 2009 and describes Curado as "knowing the company from production to engineering to sales to strategy - no one is more qualified than him".
Curado previously ran Embraer's regional aircraft division and it remains the backbone of the business. Although the 50-seat market has all but vanished for both Embraer and its rival Bombardier, the E-170/190 family - launched in the late 1990s - has been a huge success, with the 98- to 106-seat E-190/195 leading the way as airlines have increasingly moved to fill the gap below the smallest Airbus and Boeing narrowbodies. Embraer finished 2006 with outstanding orders for 264 E-190/195s, out of a combined backlog of 410 for the E-170/190 family. Almost half the E-170/190 orders came last year, with Northwest Airlines and Australia's Virgin Blue among the significant customers.
Last year saw the certification of the largest member of the family, the E-195, but production of both the E-195 and the E-190 fell below target because of delays and build quality problems at a key supplier of wing assemblies, Kawasaki Heavy Industries. According to Botelho, the problem has been solved by transferring work to suppliers in Brazil and lost ground will be made up in 2007. "Everything was going okay until they started to face difficulties with their ramp-up," he says. "They hindered our target to ramp up production and this led to lower deliveries. We are now in control - they have reimbursed us for the losses. We took corrective action and the results will be seen from the second quarter [of 2007]."
Corporate aviation has been the most significant new market for Embraer in recent years. In 2005, the company decided to "create a big business in business aviation", says Luis Carlos Affonso, senior vice-president executive jets. Until then, Embraer's sole product in the market had been the Legacy, based on the ERJ-135 regional jet.
But at that year's National Business Aviation Association convention in Orlando, it revealed mock-ups of two small business aircraft, the Phenom 100 and Phenom 300. With the Phenom 100 very light jet tapping into the fast-expanding niches for low-cost air taxis and personal transport, and the Phenom 300 the small corporate jet market, the response has been highly promising. The Phenom 100 - which will compete in the VLJ sector with the Citation Mustang and Eclipse 500 among others - will fly for the first time in a few months, with production starting in the first quarter of 2008. Around 15 to 20 will be built in the first year, with annual production rising to more than 120 by 2009.
The eight-seat Phenom 300 weighs twice as much as its sibling, due to a bigger, swept wing and larger engines, but shares suppliers and many components, and, with virtually identical flightdecks, they will have a common type rating. "For pilots and mechanics, it will be very similar," says Affonso. Its schedule is a year behind its stablemate, and some 10 will be produced in 2009.
"We are executing a long-term plan," says Affonso, which has as much to do with creating a global aftersales infrastructure as launching new product. "We have seen a big transformation in Europe and the USA in terms of support and there is more to come," he says. "This year we intend to reinforce sales and support in Asia Pacific and Latin America." Among the plans are a full-flight simulator for the Phenoms in 2008 in Dallas, operated as a joint venture with CAE, with a second in Europe a year later. As the biggest VLJ on the market, Affonso expects most Phenom 100 customers to be experienced professional pilots, although, with many taking the step up from piston aircraft, Embraer intends to offer a mentor pilot scheme.
Although the Phenom 100 is marketed as a VLJ, Affonso says it will not compete with single-engined aircraft such as the Diamond D-Jet or "small cabin twins" such as the Eclipse 500. "VLJs is becoming a crowded segment, but we don't believe our sub-segment is crowded. The Phenom 100 is very different [to its competitors] in terms of ceiling, range, speed and cabin size. We believe it is ideal for air taxi and branded charter, but also against entry-level jets such as the [Cessna] CJs," he says.
At the other end of the business aviation market, Embraer last year launched its first model derived from its E-170/190 family, the E-190-based Lineage 1000. Pitched essentially as a larger-cabin alternative to Bombardier Globals, Dassault Falcons and Gulfstreams, and as a value alternative to Airbus and Boeing business jets, Embraer expects the aircraft to do well in the burgeoning Indian, Middle Eastern and Russian markets, which account for "the majority" of around 10 orders. The Lineage was "created" following customer requests at the Dubai air show of late 2005, says Affonso, convincing the company to switch from its favoured option of a version based on the E-170 (see box).
Embraer originated largely as a defence company - with the Brazil military government in the 1960s determined to create its own aerospace capability - and, although revenues were down significantly last year on 2005, the military market could be set to make a return in terms of importance to the balance sheet. Embraer's portfolio includes types such as the Super Tucano training aircraft - operated by Brazil and Colombia - and the AMX ground-attack aircraft, developed in the 1980s with Italy's Aeritalia and Alenia and 159 of which were built before 1999. Defence represents 10% of Embraer's revenues, but Luiz Carlos Aguiar, executive vice-president of defence and government markets, has aspirations of raising this significantly. "AMX had tremendous technological spin-offs for us and we are still learning a lot about system integration," he says. "It added value to our defence business."
However, with Brazilian military spending under pressure and the FX fighter requirement on long-term hold, Embraer is not likely to invest heavily in expensive defence projects. Its main major development could be an airlifter designed to fit a niche in the market above the Alenia C-27J, but that is likely to be derived from the E-190 regional jet.
"We do all our business today with no capital risk involved, no capital in advance," says Aguiar. "All our contracts have non-recurring costs paid by the client. There is a very low level of risk." With Brazil itself accounting for just 30% of Embraer's defence revenues - down from 60% "traditionally" - the company has been forced to look further afield, and has had considerable success throughout Latin America, in Asia and the Middle East. It is pitching to Turkey for a requirement for 36 trainers and expects a decision by July. "We are competing everywhere in the trainer and light combat market [with the Super Tucano]," says Aguiar.
Despite a setback following the cancellation last year of the US Army's Aerial Common Sensor (ACS) battlefield surveillance programme, which used the ERJ-145 as its platform, he still sees strong potential in the USA, where the emerging homeland security sector could provide a market for adapted versions of Embraer's regional aircraft. Aguiar says the involvement in ACS, where it was partnered with Lockheed Martin, helped get Embraer "closer to the end user. They respected our name and made it possible to talk to them directly. We know we will always have to team up with a major prime, but we can get direction directly from the customer."
Another key focus for Aguiar is the government market for business aircraft, with the main targets Africa and eastern Europe - "where there are many older aircraft that need to be replaced in the next few years". Embraer recently sold two Legacy aircraft to Nigeria and one to Angola, and Aguiar says more deals are on the cards. "There is a real opportunity in this market and it is part of our core business."
Curado's priority in the first few years at the helm will be to cope with an unprecedented jump in output, both on regional and business jets, including a whole new production line at Gaviao Peixoto for the Phenoms. It will involve integrating not only thousands of new technicians and engineers, but new supply chains, including in Brazil where the government is keen to push traditional small and medium-size enterprise suppliers to Embraer up the value chain to manage more complex elements of aircraft design and assembly manufacturing and attract more first tier suppliers to Embraer to the country (see following feature). "After our hiccup last year [with Kawasaki], we have intensified our local presence with major suppliers," says Curado. "We are managing the supply chain more closely."
Additional reporting by Sylvia EstrellaEmbraer