By R. Viswanathan
At the 10th Biennale Aero India held in Bangalore this week, among the many global defence giants was Brazil’s Embraer (Empresa Brasileira de Aeronautica) selling both defence and executive aircraft.
Embraer’s story is one that India’s own Hindustan Aeronauticals Ltd (HAL) should emulate. Embraer was created in 1969 by the Brazilian government, just a few years after HAL was established. HAL had a head start over Embraer: it began as privately-owned Hindustan Aircraft in 1940 and made its first aircraft (PC 5 A) as early as 1941. But HAL then fell behind from lack of ambition and vision.
Embraer in comparison, was nurtured by its government, and is now the third largest aircraft manufacturer in the world. At $6.2 billion its revenues are over twice that of HAL’s. Its biggest customers are the airline companies of the U.S. and Europe. It has sold executive jets to the Indian government and private individuals, and has a $2.9 billion order for 50 aircrafts from the new Indian regional carrier Air Costa, whose fleet of four is entirely Embraer aircraft. The company also makes military aircraft, planes for agricultural spraying and is a global pioneer in the use of ethanol as aircraft fuel. In addition to a Sao Paulo listing, Embraer shares are listed on the New York Stock Exchange. Embraer is now a role model for companies from the developing world seeking to debunk the fiction that high-tech products originate only from the developed world.
It took years and nimble innovation and strategic vision for Embraer to get to this position. When it first began marketing its aircraft, the company had a credibility problem vis-a-vis established US and European brands. Even within Brazil, there was skepticism whether Embraer could successfully make a high-tech, high-risk product. Embraer proved them wrong, despite Brazilian manufacturers complaining of high cost of production, high wages and a shortage of skilled people which makes exports less competitive. Embraer has bucked the trend by getting 90% of its revenue from exports and is a national role model and a global player
How did a public sector firm from a developing country transform itself into a competitive, international, high tech manufacturer?
The credit goes to the Brazilian government’s vision and strategy for a national aircraft industry. Although it set up Embraer, it did not control the firm with the usual bureaucratic red tape. Embraer’s management had full autonomy and was free to collaborate with any Brazilian and foreign private sector companies. In 1994, during the neo-liberal wave of privatisations in Brazil, Embraer too was privatized and sold to a consortium of Brazilian and foreign investors – 20% of Embraer shares were sold to a French consortium lead by Aerospatiale Matra, Dassault and Thomson. But the Brazilian government retained its valuable shares and veto power.
Embraer initially benefitted from the captive business of the Brazilian air force. It was provided incentives and tax breaks for production, imports and exports. The state-run bank BNDES (Brazilian Industrial Development Bank) not only gave concessional credit to Embraer, but stayed an important share holder with a significant stake.
Brasila also painstakingly developed an ecosystem of educational institutions and research centers to nourish the aircraft industry in and around Embraer’s headquarters in the city of Sao Jose do Campos (in Sao Paulo State) known as Brazil’s Technology Valley, similar to Bengaluru. There, it set up the Aeronautics Technology Centre (CTA), the Institute of Research and Development (IPD), the ITA ( Aeronautical Technology Institute) and Space Research Centre INPE (Instituto de Pesquisas Espaciais). To attract students, these Institutes offered scholarships, boarding and lodging. Embraer began production in 1970 with 150 staff recruited from CTA. Even now, it absorbs many graduates of these institutes with attractive salaries, and outsources work to the technical institutes.
Embraer, the Brazil government and the Association of the Brazilian Aerospace Industries (AIAB) worked together to develop a cluster of suppliers and to incubate tech companies. The company has a substantial budget for research and development and 300 PhDs on its pay roll, resulting in proprietary technologies. Embraer’s own ex-employees are encouraged to set up units for parts and services.
The company did not attempt self-sufficiency in components or technology. Embraer mastered the basic technologies, design and integration of the more than 28,000 parts and components that make up an aircraft, but it chose to import many of these from foreign and domestic suppliers. Brazil actually facilitated the establishment of production centers by foreign suppliers, close to the Embraer plant. To offset the risks in developing and producing some of the most costly and technologically challenging components, Embraer formed risk-sharing partnerships with those suppliers which make major components such as wings, flaps and engines. This gave the world a stake in Embraer’s success.
Embraer found a niche area for its growth. Its bet on regional passenger jets rather than the bigger aircrafts or military planes paid off. It worked with the hub and spoke aviation model in developed markets, and served emerging markets needs.
Today, Embraer’s brand is so established, it has overtaken rival regional aircraft makers such as Fairchild, Dornier, British Aerospace, De Havilland, Fokker and Saab to become the world’s No 3 player after Boeing and Airbus.
HAL can learn from Embraer. Bengaluru has even a better ecosystem than Sao Jose dos Campos, with more tech companies, research institutes, human resources and a broader range and depth in science and technology knowledge. The scientists who created history by sending the Mangalyaan mission to Mars for Rs. 7 per kilometre, can certainly give Embraer some competition. By creating a similarly conducive environment and bringing private sector participation in HAL, New Delhi can nudge it along the Embraer path so it can be part of Prime Minister Modi’s ‘ Make in India’ success.
Ambassador Viswanathan is Distinguished Fellow, Latin America Studies, Gateway House. He is the former Indian Ambassador to Argentina, Uruguay, Paraguay and Venezuela, and Consul General in Sao Paulo.
This case study was exclusively written for Gateway House: Indian Council on Global Relations.