Embraer: Flying Further and Faster into the Future
A corporate strategy article by Thunderbird students Mitch Epstein, Chad Bonfiglio, Trudy Sharp, Edgar Khachatryan and Alyssa Watt
Embraer, a Brazilian aircraft manufacturing company, flew into a lead role in the regional jet industry. With a tagline of “For the Journey,” Embraer faces significant pressure and competition. In order to maintain and extend its lead in the industry, Embraer will have to build on its unique history and push harder and deeper into strategic relationships and innovations.
Embraer’s unique relationship with the Brazilian government has positioned the company well to continue pursuing its lead in the regional aircraft market. When the Brazilian government was looking for a national champion in the late 1960s, in the airplane manufacturing sector, it created its own “mixed enterprise.” Created in 1969 as a joint venture, shareholders and the Brazilian government formed Empresa Brasileira de Aeronáutica, better known as EMBRAER.
The Brazilian government enabled Embraer to focus its attention on assembling aircraft by placing high tariffs on aircraft imports and threatening to continue to increase import duties. This government supported strategy continued through the end of the 1980s; however, the first Gulf War and the subsequent worldwide recession that followed in the 1990s affected the entire aviation industry, left Embraer near bankruptcy, and the Brazilian government searching for a new majority stakeholder in the private sector. During the final years of the crisis era, the Brazilian government began privatization of Embraer by facilitating partnerships with several companies in the aerospace industry, leading to a new stream of technology and innovation that fueled global growth of its regional jets, a new and fast-growing niche market. The currency crisis in Latin America as well as the loss of large defense contract in the Middle East following the Gulf War exposed Embraer’s weakness – its reliance on government intervention and focus of acquiring high-tech performance rather than on pure market consideration. However, it is argued that without the Brazilian government’s direct intervention, Embraer may not have survived in its nascent stage or during the crisis stage that followed.
Today, Embraer is a world leader in aircraft manufacturing and vies for the number three position with Bombardier, against Boeing and Airbus. This position is unmistakably the result of the Brazilian government facilitating alliances with international aerospace firms who offered crucial technologies leading to a reduction in capital costs and the building of the regional jet market. The Brazilian government also provided the means for market access through import barriers, allowing global penetration and brand awareness. Continuing its unique relationship with the Brazilian government will enable Embraer to extend even further its lead in the regional aircraft market.
Discovering and Expanding the Market Niche
During the mid-1990s an underserved market created an ideal sea of opportunity for the freshly privatized Embraer. Commercial airlines were seeking to replace their outdated turboprop fleets currently servicing regional routes. These turboprops were far from spacious, noisy, and slow when compared to jets typically reserved for longer routes. Embraer saw this market niche and made its move by developing its ERJ jet aircraft line that carries between 20 and 150 passengers.
It was during this same period that the industry giants Boeing and Airbus were funneling the majority of their research and development into the jumbo and super jumbo category of aircraft. Believing that the future of the airline industry was to carry greater numbers of people further distances, the industry saw products like the Airbus A380, capable of carrying more than 850 passengers come to market. While Boeing and Airbus fought a bloody battle to sell their high capacity aircraft in the United States and elsewhere Embraer flew in and captured 86% of the regional jet market by 2000. Between 1995 and 2000 the Brazilian company double the number of Embraer branded regional aircraft sold in the United States reaching a total of 401 by the new millennium, and continuing to grow at around 11% annually since.
A secondary blue ocean within the regional jet market that Embraer pushed to discover in the late 1990s was the slightly larger jet that carries between 70 and 118 passengers. Called the Embraer 170 and 190, this mid-size jet filled an additional missing piece in the market and is now the primary product being sold overseas. As rival regional jet manufacturer Bombardier is not slated to produce this size jet until 2013, this kind of strategic eye for new market space is what’s enabled Embraer to become the industry leader and will need to be further built on as they continue to fly further and faster.
Although there is contrasting opinion on the future of the market trend toward regional jets, Embraer already has orders for 1,748 aircraft on their backlogs, illustrating that future for regional jets is long and bright.
Regional Agreements and Politics
In order for Embraer to continue its dominance in the regional jet market, it knows too well that it must expand into fresh and emerging markets. The Middle East, Asia, and Latin America are all such markets where air travel is beginning to grow substantially, and Embraer is positioning itself to capitalize on this demand. The lifespan of a jet is fairly long, and because the United States and a fair portion of Europe are already saturated the company must look elsewhere for growth.
Embraer’s home country of Brazil serves as an enormous asset for their operation. Over the past two decades the country has evolved from an underdeveloped nation to one of the world’s fastest growing economies and political system. The country’s political neutrality and trade focused economy have allowed Embraer to create and capitalize on a number of partnerships and associations.
Brazil’s involvement in the Mercosur free trade bloc that counts Paraguay, Uruguay, Venezuela, and Argentina as members has allowed Embraer greater access to the aircraft markets in these partner countries. Currently the company supplies aircraft to all of the aforementioned partner nations with a major order just made by the newly oil rich Venezuela. The value of this order is 900 million dollars.
Recognizing the rampant growth of China, the world’s number two economy, Embraer began working years ago to secure as much market share as possible in the country. These efforts have led to a cooperative production facility in Harbin that began just after the new millennium. Originally structured to produce regional aircraft for the Asian market, China has somewhat soured on the focus because their preference for indigenous innovation and the development of their own product. Unfazed by this, Embraer has developed a new strategy to remain in China’s good graces and is focusing on production of another class of aircraft.
Embraer also has a keen understanding that 1.3 billion people in India are a rapidly growing market for air travel. Working diligently to secure agreements with regional airlines, the company is pitching their E class jets as an affordable way to carriers to expand into smaller cities and seize the dollars being spent by the country’s growing middle class. This kind of strategic planning and positioning will be key with other emerging markets, in order for Embraer to maintain and extend their lead in the industry.
Research and Development
Embraer has been spending close to $80 Million annually on research and development for the past six years, living up to the words of Michael Porter, “Innovation is the central issue in economic prosperity.” Their most recent expansion has been the new Engineering Technology Center in Melbourne, Florida, where Phenom series Executive Jets are assembled. In the Melbourne facility R&D activities will be on newer and lighter aircraft materials and high-tech innovative products. The initial focus of the R&D team will be interior design, serving the high end, luxurious Executive Jet market. In 2010 Embraer launched the New Programs-Airline Market initiative with R&D activities such as the reengineering of the E-Jet line for range and fuel efficiency, alternate aviation biofuels, and composite fuselage design.
In addition, Embraer has been working with the major three aircraft engine manufacturers, General Electric, Rolls-Royce and Pratt & Whitney, to develop a new generation of engines for the E-Jet series Aircraft. The goal of the development effort is to reduce fuel efficiency as much as 15%; this effort also includes propeller engines as one of the viable options.
Another area of innovative exploration involves sugarcane. Brazil leads the world in sugarcane production for many years and recently became the second largest ethanol fuel producer from sugarcane. Brazil’s automotive industry has been using ethanol fuel in their flex-fuel cars since 2003. In 2011 Embraer Joined forces with Boeing to develop alternate jet fuel technologies (biofuels) particularly from sugarcane.
Composite material and structures are also a hot topic in Embraer’s R&D groups. Embraer is currently investing in composite material technology for aircraft wing and fuselage. Composite materials have the potential to reduce the aircraft weight as much as 15%. Continuing to pursue innovation and new technologies will enable Embraer to continue its hold on its lead in the regional jet market.
Corporate Social Responsibility
Strategically considering corporate social responsibility priorities will also enable Embraer to maintain and extend their lead in the industry. Rather than the standard social programs that generically encourage “sustainability” or strengthen reputation and brand appeal, Embraer can consider avenues for creating shared value where society benefits while simultaneously supporting company goals.
Embraer has done this well through the creation of its recycling program. The program for recycling waste such as wood, cardboard, plastic, and styrofoam began in 1998. As of 2007, the program recycled 79.6% of such goods, which resulted in $6.6 million of income for the company.
In 2011 Embraer also joined the Aircraft Fleet Recycling Association, a nonprofit association focusing on strong environmental approaches to the disassembling and recycling of aircraft when they reach the end of their life cycle. This commitment to recycling sends a strong message about Embraer’s values to preserve and safeguard the environment as well as providing a source of income for the company.
Embraer has also shown a commitment in the past to partnering with Brazilian Universities for educational programs targeting specific projects within aeronautical engineering. Embraer provides the technologies and resources and the provide the instructors, resulting in a strong development of skilled Brazilian engineers. While there is temptation to weaken this partnership and simply outsource some of these projects, it will be critical for Embraer to continue this commitment to building the capacity of the next generation of engineers.
In 2002, Embraer created an innovative high school giving a select few underprivileged youth the opportunity of an excellent education. Funding for the program comes from JetBlue, who donates $10,000 to the program for every Embraer plane delivered, from Unibanco, a major Brazilian bank and from 1% of the credit card purchases of all Embraer employees. August 2006, Embraer further developed the mathematics and physics laboratories to strengthen the engineering module for the students. This kind of pioneering effort to drive shared value between society and corporate strategy is one Embraer should continue to push harder and deeper as it seeks to expand company lead in the industry.
The Sky’s the Limit
With a fantastic history of innovation and strategic relationships, Embraer has the brought the momentum of the regional jet industry along with it. To stay ahead of the competition, Embraer will need to be relentless in its pursuit of better technology, leveraged government relations, and ultimately, shared value with customers and society. Only then will they be able to maintain and extend their lead, for then, truly, the potential is limitless.
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