IBSA and the Aerospace Industry in Brazil Mario Marconini South-South Economic Cooperation: Exploring IBSA (India-Brazil- South Africa) Initiative Johannesburg,

IBSA and the Aerospace Industry in Brazil

Mario MarconiniSouth-South Economic Cooperation: Exploring IBSA (India-Brazil-South Africa) Initiative Johannesburg, 28 June 2006

Marconini IBSA Aerospace Joburg 28.06.06 2

Trade Balance – 1950-2004Trade Balance - 1950-2004

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40


Trade as part of GDPBrazil: no longer the least open

Similar to high-GDP countries; or,Countries notoriously closed;

1.7 times more closed than the world average2.2 times more closed than Mexico;2 times more closed than China;2.75 more closed than Canada

Source: The World Bank, WDI Data Query

Market Opening, Various Countries, 2002

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10

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80

18,3 18,9 20,8 24,3 30,6 33,5 33,7 40,4 46,2 48,3 49 51,1 52,4 55,2 55,8 56,6 66 67,1

U.S. Jap Ind Brz Col Aus Arg Wld Fra Rus Chn Nes Mex Chl Ger Saf Kor Can


Regional Trade Flows, 2004

European Union24%

Asia17%

Rest of Latin America9%

Mercosul10%

Middle East4%

Africa7%

Eastern Europe2%

Others7%

United States20%


Trading PartnersExports to the U.S., 2004

Manufactures74%

Semi-Manufatures

18%

Primary8%

Exports to the E.U., 2004

Manufactures41%

Semi-Manufatures

11%

Primary48%

Exports to India, 2004

Manufactures40%

Semi-Manufatures

44%

Primary16%

Exports to China, 2004Manufactures

18%

Semi-Manufatures

23%

Primary59%

Exports to South Africa, 2004

Manufactures73%

Semi-Manufatures

5%

Primary22%


Brazil-IndiaBrazil-India, Trade Balance and Flow, 1985-2004

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600

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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Trade Balance Trade Flow

Graph 9: Brazil-South Africa, Trade Balance and Flow, 1985-2004

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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Trade Balance Trade Flow


Brazil-IndiaBrazilian Exports to India, 1985-2004

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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Primary Semi-manufactured Manufactured

Brazilian Exports to South Africa, 1985-2004

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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Primary Semi-manufactured Manufactured


IBSA in relative termsExport Growth 1997-98/2003-04

Import Market Size

More than US$ 100 billion/Year

Between US$ 20 and 100 million/year

Less than US$ 20 million/year

More than 100%

South Korea, Mexico, China

India, South Africa, Russia, Thailand

Algeria, Costa Rica, Iran

Between 63-100%

U.S., Canada Saudi Arabia Chile, Colombia

Less than 63% E.U., Japan Morocco, Venezuela, Argentina


Brazilian Aerospace SectorAeronautics - manufacturers and suppliers in the production of civil aircraft, airplanes and helicopters, propulsion systems and electronics;

Defense - the production of aircraft and systems for military purposes; and,

Space - manufacturers and suppliers of satellites, launchers and special surveying systems both for military and non-military purposes

Total Firms 35

Aeronautics 28Defense 11Space 19

Firms per area

Nautics

DefenseSpace

5 20

12

77 2


Brazilian Aerospace Sector

One of most dynamic sectorsDirect relationship with national security;High technological linkages and spillovers;One of the country's main exporters; and,Productivity levels and growth perspectives.



2000 2001 2002 2003Annual Revenues 3.200 3.400 3.010 2.530 Total Exports 2.835 3.110 2.710 2.230

In US$ million

Revenue Participation per area in 2003

Aeronautics; 87,33

Defense; 11,84

Space; 0,13

Others; 0,7



2001 2002 2003 2004Exports 5.025 4.220 3.413 4.525 Imports 3.300 2.190 2.199 3.411 Balance 1.725 2.030 1.214 1.114

In US$ million

Aerospace Sector Exports

2002 % 2003 % 2004 %EMBRAER 2.493 59,1% 2.052 60,1% 3.170 70,1%Other firms 1.727 40,9% 1.361 39,9% 1.355 29,9%Total for the sector 4.220 3.413 4.525

In US$ million


Brazilian Aerospace Sector1941 – Ministry of Aeronautics1945 – Idea of a Aeronautical Technological Center (CTA)1946 – Organizational Commission1947 – Military Engineering in Rio transferred to São José dos Campos1950 – First ITA class1954 – CTA created, also Research and Development Institute (IPD)1969 – Embraer created as state-company1971 – Bandeirante and air force contracts start1975 – Embraer first export: Uruguayan Air Force1979 – Embraer: presence in the U.S.1983 – Embraer: presence in Europe1990 – Embraer major financial crisis; downsize 13 to 9.9K employees1994 – Privatization of Embraer


The Embraer Phenomenon

Empresa Brasileira de Aeronáutica13,000 direct, 3,000 indirect of 18,000 jobs80% of aerospatial MSMEs’ revenues Virtually all integrated with Embraer chain11 service suppliers formed a ventureEmbraer and partners in aeronautics and defenseOnly space: Orbisat and OrbitalMulti in helicopters: Helibras


The Embraer PhenomenonHigh R&D, strategic partnerships, government supportMain thrust of restructuring: integration into international market for regional jetsBiggest Brazilian exporter in 1999-2001: over $2 billionFour market segments:

Commercial: 37-50 seater and 70-106 seaterCorporate: private jetsDefense: same ERJ-145 platform for intelligence, surveillance, reconnaissanceServices: after-sale, replacement parts, maintenance

Commercial aviation: 70-80% of total revenues


The Embraer Phenomenon

Two directives:to seek flexibility and competitiveness by means of the coordination of partner networks in the development of airplanes to organize production according to aircraft "families".

Three types of partners:Risk partners. supply large aeronautical systems and join Embraer's projects as investors;Suppliers. do not take part in the development of projects, only supplying components and other inputs;Subcontracted. SME’s created and conducted by former Embraer staff


The Embraer PhenomenonCharacteristics of Embraer's Productive Chain Participants by Category

Risk Partners Suppliers Subcontracted

Participation

Co-development with Embraer. Take on risks

Respond to specifications by Embraer

Receive Inputs and Specifications from Embraer and sell services by man/hour.

Family 145 4 (Structure and Interiors) 350 (Avionics, Electronics,Propulsion, Inputs, Mechanics-

Hydraulics)

Engineering Services of Projects/Systems;

Other services and chemical treatment

Family 170/190

16 (Avionics, Electronics,Propulsion, Mechanics-

Hydraulics, Structure, Interiors)

22 suppliers overseas Ditto

Location Most overseas Most overseas Brazil

Purchasing Policies

Exclusivity contract; Investment amortized with sale of airplanes (payment in 110 days)

Exclusivity contract (payment in 75 days); contracts of 1 to 3 years (payment in 30-90 days)

Contracts of 1 to 2 years (payment in 30 days); service orders.


The Survey

Second semester of 200512 firms contactedDistrust with the project

Additional information and clarificationsLinkage of project to governmentSources of financing for the researchRecourse to high technology

Economic relevance: Embraer alone


The SurveyFirm State Operating Area

Aeromot RS Aeronautics, Defense and Space

Atech - Tecnologias Críticas SP Aeronautics, Defense and Space

Avibrás SP Aeronautics, Defense and Space

Cenic SP Aeronautics, Defense and Space

Embraer SP Aeronautics, Defense and Space

Helibrás MG Aeronautics, Defense

HTA, High Technology Aeronautics

SP Aeronautics

Mectron SP Aeronautics and Space

Omnisys SP / RJ Aeronautics and Space

Orbisat SP / AM Space

Orbital SP Space

VEM RJ / RS Aeronautics


Survey Findings: General

Positive impression re: industry futureNeed to attract world-class suppliersSpace less developed than India or China

Develop indigenous technology

½ traded with India or South AfricaExports: dynamic developed marketsImports: quality of products

Supplying firms: need for certification


Survey Findings: GeneralAviation systems: oligopoliesAlternatives in India and Russia

Little prospecting yet

¾ never heard of IBSA¼ heard of it but highly skeptical anywayEmbraer: exports to bothAeromot: sales to S.A. but not IndiaOrbisat: sales to S.A. but not IndiaNone see significant increase in IBSA business


South-South Cooperation

½ – cooperation projects China – CIBERS satelliteRussia – satellite launchers

½ – France and Germany¼ - knew of India project½ – considered infeasible with IBSA

Embraer already has global networkBetter to have productive chain at home


South-South CooperationSpace sector

Interest with India: satellite manufacture, launching technology, optical radars, image sensors, launching vehicles.Interest with South Africa: military aircraft parts

G-20 type of grouping on subsidiesTechnical barriers, not a problem

Exception: emissions and noise in E.U.IBSA for bargaining technology transferFinancing crucial: government could help to provide level playing fieldCountry Image: Embraer’s effect


CapabilitiesEmbraer: long-haul market would be a "suicide“Significant political incentives

Radars, detection of oil spots in S.A. oceanPolitical blockage: Brazilian government crucial

Lack of funding, interest, priorityOrbisat: Radars in Embraer’s aircrafts

Market access, doing business in IndiaDifficult to comprehend, decision-making hierarchies, corruption

Infrastructure: governmental support, unavailable fundsR&D: deficient in geostationary satellites and launchers

Lack of investment in higher educationHigh interest rates and short loan duration

Embraer: distances and freight not importantTechnical requirements and high values and quantities, very important

Orbisat: effective partnership with India: satellites and radarsLost to Israel in India due to lack of presence and contacts in Indian government


Value Addition

¼ - aircraft “from the South”Long-haul – segmented, highly competitive, well established, highly oligopolized (4 multis)R&D – only element of IBSA cooperation

Market agreements, joint research, technological swapsOnly in defense and space – not aeronautics


Government InvolvementSkepticism

Do internationally what has not been done internally

Yet,Project in defense and spaceFinancing at competitive rates and durationsNationalization of segmentsIntermediaries with foreign governmentsStimulate small enterprises in specific projectsCreate special entity or regulatory agencies

Presidential visits: events, fairs and commercial visits, more beneficial


Threats

¼ - IBSA cannot improve bargaining¾ - IBSA cannot replace the developed½ - IBSA cooperation – improbable½ - IBSA technology transfer feasible½ - IBSA technology transfer irrelevant


Ten Conclusions1. Brazil’s sector integrated into the world2. Little to gain in aeronautics3. Cooperation only in defense and space4. Long-haul is really a “long-haul” shot5. India seen as very difficult for firms6. Skepticism re. government initiatives7. Better to nationalize world-class production8. Government can support and mediate9. IBSA cannot change the developed10. IBSA cannot replace the developed

Documents

IBSA and the Aerospace Industry in Brazil Mario Marconini South-South Economic Cooperation: Exploring IBSA (India-Brazil- South Africa) Initiative Johannesburg,