Embraer’s Emergence as a

Leading Aircraft Company:

Lessons for Indian High Tech
Enterprise

Rishikesha T. Krishnan
Indian Institute of Management Bangalore
rishi@iimb.ernet.in
 Embraer: A Snapshot
• Major player in commuter aircraft market
• 2002 sales: $2.5 billion
• 2002 net profit: $223 million
• Commercial aircraft account for 85% of
sales
• Moving towards larger aircraft: direct
competition with Boeing & Airbus
 Embraer: Key Milestones
• 1941: Brazilian Aeronautics Ministry
• ’40s, ’50s: CTA, ITA, IPD formed
– CTA projects in the aircraft industry
– ITA training of aeronautical engineers
– IPD R&D using 50 German engineers
– Co-located at Sao Jose dos Campos
• 1969: Embraer formed to manufacture
aircraft at SJC
– “Resources of State + Agility of pvt sector”
 Embraer: Product History
• 1971: Xavante
– Jet trainer & ground attack aircraft
– Under license from Aermacchi
• 1972: Ipanema
– Agricultural spraying aircraft
– Based on IPD design
• 1973: Banderainte
– 19-seater turboprop passenger aircraft
– Derived from IPD design
– More than 500 sold
 Embraer: Product History
• 1973: Banderainte (contd.)
– First U.S. order 1978, certification
– 1981: 39 sold in U.S. market
– 1984: 130 in operation in U.S.
• 1985: Brasilia
– 30-seater, pressurized turboprop + Low opg cost
– 1999: cumulative sales 350 + High cruising speed

– “workhorse” of U.S. commuter airlines

• Late 1980s: CBA123
– Shortened version of Brasilia (19 seats)
– Jt. project with Argentina
– First major flop – over-engineered, pricey
 Major Developments
• 1990-94
– World recession
– Brazil serious macroeconomic problems –
unable to sustain procurement & financial
support
– Hyperinflation
– Sales $700m → $177m
– Workforce 13,000 → 6,100
– Average loss $200m/year
– Privatization mooted
 Embraer post-privatization
• Privatized December 1994
– Brazilian investor group + pension funds
– New CEO from CBS
– Changes in senior management
– Restructuring 7 levels → 5
– Engg orientation → market orientation
– Headcount 3,200 (April 1997)
– Average salary
 Embraer post-privatization
• Fortunes bet on ERJ 145
– Conceived in 1989
– Stretched, jet-powered version of Brasilia
– 50 seats
– Development cost of $300m
• $115m loan from BNDES
• Four risk-sharing partners ~$100m
– Flew for first time August 1995
– Certified December 1996
– Continental Express ordered 25 + 175 in Fall 1996
– Variants: ERJ135 (37 seats); ERJ140 (44 seats)
 Embraer post-privatization
• By 1999
– Sales of ERJ145 + ERJ135 83% of total
– Locus of Revenues shifted to U.S. (65%)
– Decision to develop planes in 70-110 seat
range
– Shift to jets strong
– Regional traffic expected to grow fast
– Comfort, environment important
Embraer vs. Bombardier
ERJ145 CRJ200

Basic Opg 27,400 30,900

Wt (lbs.)
Ref. Price 17.6 21
($ million)
Fixed 23 131
costs
($/flight)
Variable 227 157
costs
($/hour)
 Competitiveness of new range
• Clean sheet design – “unconstrained
optimization” (but $800m devpt costs!)
• Specially designed for size class
• Larger risk-sharing partners, vendors↓
• Bombardier – stretching existing version
• Airbus, Boeing – smaller versions of larger
aircraft ⇒ higher weight
• Less profitable for Airbus, Boeing
 Future of Embraer
• WTO tussles with Canada/Bombardier
• Get large Brazilian defence contracts
– French investments from Aerospatiale/Matra,
Dassault, Thomson-CSF, Snecma
– “Strategic alliance” for defence contracts
(longer lead times, higher complexity, but
higher margins)
– Manufacturer of military aircraft → supplier of
intelligent defence systems
• Question: How important is size?
 Govt. Support for Embraer
• Early days
– Purchase preference by federal agencies
– No taxes or duties on imported raw materials,
parts and equipments not available locally
– Brazilian corporations could invest 1% of their
federal income tax obligations in Embraer
– Embraer raised $350m in capital
 Govt. Support for Embraer
• Privatization
– Govt assumed $700m of Embraer debt
– Recapitalized another $350m
– Low reserve price
– Allowed partial payment in bonds
• But
– No layoffs for six months
– No change of control
 Govt. Support for Embraer
• Later
– Financial support from BNDES
– Interest equalization scheme
– R&D benefits available to other firms
 What can we learn
from the Embraer experience?
The Determinants of Company Performance

Company-
Industry National
specific
context context
factors

Company
performance
Technology Pillars of Embraer’s
Business Model
Qualified
People

Global Customer Satisfaction

Positioning

Cash
Intensiveness

Flexibility Source: Embraer Annual

Report 2002
 Explaining Embraer’s success
Capability Building
• Existing base of aerospace competence
• Early support from Brazilian government,
air force to build capabilities
• Identification of core competence in design
& system integration
• Flexibility to top management
 Explaining Embraer’s success
Dynamic linking of capabilities to market
• Privatization just in time
• Reading of market, right bet on regional jet
market through ERJ145
• Risk-sharing partnerships
• Innovations in organization, finance,
marketing
 Explaining Embraer’s success
Managerial best practices
• Platform approach
• Customer-driven product development
• Joint development with vendors
• “Virtual reality” & concurrent engineering
• Kaizen & JIT
 Explaining Embraer’s success
Other factors
• Continuity in leadership – Silva, Botelho
• Support for export finance
 Lessons for
Indian High Tech Sector

• Build technological capabilities

• Flexible and innovative organizational,
marketing & financial arrangements
• Understanding of user needs
• Creative management of risk
• Control of value chain rather than
indigenous manufacturing content
 Rationale for government support
to aerospace industry
• Large investments in R&D
• Long lead times between development &
commercialization
• Cyclical nature of the industry
• Critical role of aeronautics in national
defence
 Forms of government support
• R&D Support
• Purchasing loans and export finance
assistance
• Government contracts
 Role of Government
• Creation of specialized human and
technological assets
• Facilitation of changes in organizational
forms and structures (cf. China)
• WTO-compatible “subtle” support
– Support for R&D, regional development
– No export subsidies
 Bibliography
• Ghemawat, P., Herrero, G.A., and L.F. Monteiro
Embraer: The Global Leader in Regional Jets.
Harvard Business School Case No. 9-701-006,
October 20, 2000
• Goldstein, A. From National Champion to Global
Player: Explaining the Success of Embraer
Oxford University Centre for Brazilian Studies,
Working Paper CBS-17-2001
• Cassiolato, J.E., Bernardes, R., and H. Lastres
Innovation Systems in the South: A Case Study
of Embraer in Brazil. Unctad/DITE Study, 2002.
Thank you