01 Sep 2009
Council on Hemispheric Affairs
History: How Embraer became the flagship of the Brazilian arms industry
Embraer’s history can be traced back to the Brazilian military junta that ruled the country from 1964-1985. When Embraer was founded in 1969, the junta was led by General Emilio Medici, who wanted the country to have its own self-contained aircraft-manufacturing company, with the state controlling 51% of the shares.
While Embraer is commonly mentioned today as Brazil’s major military industrial complex, it should be recalled that it also was one of three such companies in Brazil during military rule and afterwards. As its name suggests, Embraer focused on aircraft, with the Tucano becoming its flagship military product. The other prominent Brazilian military industries were Avibrás Indústria Aeroespacial S.A. (Avibrás), which was established in 1961, and Engenheiros Especializados S.A. (Engesa), which began its operations in 1963. Globalsecurity.org explains that “by 1980 Brazil had become a net exporter of arms. On the demand side, the rapid success resulted from a growing need in the developing world for armaments,” specifically, those that met specialized performance and cost qualifications. “On the supply side, Brazil’s arms exports were designed for developing world markets and were noted for their high quality, easy maintenance, good performance adverse conditions, and low cost.”
In the course of the Iraq-Iran War in the late 1980s, Iraq would become a major client of the Brazilian military industry. The Stockholm International Peace Research Institute reports that 40% of all Brazilian arms transfers from 1985 to 1989 went to Iraq. The armaments included over 800 armored fighting vehicles (EE-3/-9/-11) and over 60 ASTROS rocket launchers. In 1989, Brazil chose to sell Tucanos, Embraer’s relatively low cost and basic military aircraft, to Iran, showing that business and financial factors trumped any particular ideological preference for Iraq.
In contrast to Embraer’s strong sales to both sides in the Iran-Iraq War, its competitor, Engesa, did not encounter such success. In the late 1980s the company showcased its newest battle tank, the EE-TI Osorio but due to changing political tides was unable to land customers for the product. Despite Saudi Arabia’s initial interest in the Osorio, the Iraqi invasion of Kuwait prompted the Saudi Royal family, in near panic, to turn to the U.S. as its main military supplier. Left without its prime customer, Engesa was forced to declare bankruptcy in 1993. In order to shield its domestic military industry, the Brazilian government privatized Embraer under Plan Collor, as part of president Fernando Collor de Mallo strategy to privatize state-run companies to save them from bankruptcy.
Today Embraer stands as the undisputed leader of the Brazilian military and civilian aircraft industry. In an interview with COHA, Dr. Thomaz Costa, Professor of National Security Affairs at the Center for Hemispheric Defense Studies at the National Defense University, explains that “[Embraer’s] business philosophy seems to reflect a market position defined by producing platforms with technology, electronic components, and had a large array of private stock of parts available in its on-site global market. Its products directed to civilian markets are based in cost-effectiveness of product life cycle.” Dr. Costa argues that “Embraer has been successful in identifying market niches before the market fully develop demands (i.e., the Bandeirante and the ERJ for commuter services, the Tucano for military training, and the new series 90-120 seater airlines).”
For Embraer, 2004 was a “golden year,” as it delivered 148 civilian and military aircrafts. A 2005 Military Technology article indicated that at the time Embraer had invested around $45 million on its Gaviao Peixoto floor workers. However, in recent years the company has suffered from the ongoing global financial crisis and continues to receive more bad news. In February 2009, Embraer announced its plan to cut as much as 20% of its active worldwide workforce of 21,362, including both management and production. According to an Agence France Presse article, Embraer’s shares slid nearly two percent to $14.50 on the New York Stock Exchange immediately following the announcement. Furthermore, another bad blow occurred when the Chinese-owned Hainan Airlines Co. announced in May that it would reduce its order of ER145 passenger jets from the original 50 to 25 (12 planes already had been delivered). Embraer announced that “over 90 percent of its revenues are generated abroad,” leaving it particularly vulnerable to the global economic recession.
The Civilian Division
Embraer’s civilian wing is also a critical part of its industry. As NDU’s Dr. Costa explains, “the military portion of Embraer is pretty small compared to the civilian component. It is very similar to Boeing, where one division produces the F-18, but the bulk of the revenues and commanding business model is civilian.” An example of Embraer’s record-making financial gains occurred in 2008 when the company reported it had gained $175 million in the third-quarter of that year.
Like the military division, civilian products are largely export-based and similarly susceptible to the international economic environment. Prior to the devastating hit generated by the financial crisis, Embraer had made deliveries to U.S. carrier Northwest Airlines in 2007, and in 2008 there were talks of the company’s E-190 passenger jet being sold to JetBlue. Also in 2008, the company sold 6 type-170 jets to EgyptAir Holding Co. for $189 million. According to a January 2009 report in the Associated Press Financial Wire, Embraer delivered 204 planes in 2008, a 21% increase over the 169 jets delivered in 2007. Given their previous reliance on sales of midsize and executive jets, it is not surprising that the company has taken a particularly strong hit from the current economic crisis as demand for these aircraft falls..
What military aircrafts is Embraer producing these days?
In spite of its current troubled financial situation, the nascent Brazilian military industry is producing a number of potentially successful products (its civilian aircraft line aside). While it is no longer turning out the Tucano, the company has upgraded to the Super Tucano. Today, Embraer’s top military products include:
• The ALX Super Tucano which can be used as a training aircraft as well as for patrol and light attack missions. In 2008, Embraer presented an upgraded version which consisted of TOSS (Training and Operation Support System) computer systems with improved capabilities like a Mission Planning Station for navigation and planning attack missions.
• The AMX light attack aircraft and its AMX-T two-seat, combat-capable trainer version.
• The P99 MP/ASW aircraft and the EMB military versions which can be used for remote sensing and maritime patrol.
• The KC-390 medium transport/tanker aircraft, which was announced in April 2009 at the Latin American Aero and Defense show in Rio de Janeiro. The plane was designed to compete with the now aging U.S. workhorse, the C-130.
Russia announced in April 2009 that Embraer might join the Russian-Indian joint venture of producing the fifth-generation fighter aircraft (FGFA) version of the famous Sukhoi fighter. Currently, the aircraft is being developed by Russia’s United Aircraft Corporation and India’s Hindustan Aeronautics Limited, following a 2007 agreement. “We are discussing with the well-known Brazilian company Embraer the transfer of technology and the construction of facilities for the future licensed production of aircraft, including FGFA,” said deputy director of Moscow’s Federal Service on Military-Technical Cooperation, Alexander Fomin.
In an interview with COHA, Iñigo Guevara, a specialist in Latin American defense industries and a CONACYT fellow at Georgetown University’s Security Studies Program, explained: “[T]he current FX2 program, which will lead to the selection of the Rafale, JAS-39 Gripen or F/A-18E Super Hornet to become Brazil’s next generation fighter, will see a fair amount of technology transferred to Embraer, which will enable it to license, produce and eventually develop a fifth generation fighter.” He goes on to explain that the new generation of fighters would be of considerable interest to the contemporary global market, and would nicely position Brazil alongside the U.S., Russia, China, France, and Sweden as making up an elite group independently developing and producing jet fighters.
It is important to highlight that Embraer is not the only Brazilian military plant currently creating production lines. Other examples of promising military-related companies include:
• AVIBRAS, which produces the ASTROS self propelled MLR batteries.
• AGRALE, which produces the Marrua jeep.
• The Brazilian Army, in cooperation with IVECO, produces the VBPT-MR (Urutu-3) armored personnel carrier.
Projects for the production of heavy battle tanks, like the attempts to promote the Osorio in the 1980s and 1990s, are notably absent. According to Guevara Brazil is not pushing for an in-country fabricated battle tank, such as the Osorio or Tamoio, “because Brazilian planners do not envisage a large enough need for a tank in Brazil’s list of defense requirements in its current or future export market.” This explains why Brazil has recently purchased 250 German Leopard 1 battle tanks. Purchasing already established tank models becomes more effective and offers less logistical problems than designing and building a Brazilian model from the ground up.
Embraer’s Domestic Deals
Brazilian Defense Minister Nelson Jobim declared in April 2009 that Embraer will develop a new fleet of military transport aircraft for the Brazilian Air Force. Brazil currently uses the aging American C-130 Hercules, which soon will be replaced by Embraer’s KC-390. The plane is capable of transporting Brazil’s 20-ton Urutu III armored personnel carriers. Embraer’s hope is that this will be the first of a new batch of contracts for their new military aircraft division that would reverse their losses and lay-offs from recent months. Embraer also announced in April that it had signed a contract to modernize 12 Brazilian navy jets, including 9 AF-1s and 3 AF-1As. According to a report by Defense Daily, “[t]his upgrading is designed to fully restore the operating capacity of the navy’s 1st Intercept and Attack Plane Squadron.” Frederico Fleury Curado, Embraer’s president and CEO, has declared that “by choosing Embraer, the navy is making an important contribution to consolidating the technological and industrial capacity of [Brazil’s defense industry] for modernizing military aircrafts.”
Brazilian Arms Merchant to Whom?
Embraer will have to compete with other military industrial companies if it wishes to establish itself as a leading global arms merchant of military aircraft. Such companies in countries like the U.S., Russia, and China have increasingly consolidated themselves as suppliers of weaponry for a number of Latin American and other developing countries. Europe, both as a collective unit and as individual states, has also attempted to gain footholds in the Latin American market, with mixed results. Guevara argues that Embraer has established a name for itself as it provides “western technology at an affordable price.” Dr. Sean Burges, an expert on Brazilian affairs at the University of Ottawa and a COHA Senior Reasearch Fellow, explains that “Super Tucanos are not up to taking on a Mig or F-18, but they’re pretty damn effective against a Cessna aircraft, a truck, or even a tank. [This makes the Brazilian warplanes good for] low-level border war and anti-narcotics aircraft work.” Besides affordability, a major reason for developing countries’ demand for Embraer models is the company’s production of aircraft which are suitable for specialized missions and immediate threat responses, which do not require the high-performance attack aircraft like those produced by the U.S. and Russia.
In 2005, Embraer and Colombia signed an agreement to supply the Colombian Air Force with twenty-five Super Tucano turboprops, all of which have now been delivered. In July 2008, India signed an agreement to purchase three EMB 145 AEW&C (Airborne Early Warning & Control) planes. The first delivery is scheduled for 2011.
In August 2008, Chile signed an agreement to buy twelve Super Tucanos, with the Brazilian media estimating the deal at $120 million. “We are very proud to announce that the Super Tucano is the aircraft chosen by the Chilean Air Force, which is internationally recognized for the high professional capacity of its personnel,” said Luiz Carlos Aguiar, Embraer’s Executive Vice President of Defense and Government Market.
More recently, in January 2009, the Thai military purchased one ERJ 135 for civilian and military transport. The Royal Thai Army and Navy ordered two similar aircrafts in 2008 as well. That same month the Dominican Republic purchased eight Super Tucanos for border patrol and anti-drug operations. In March 2009, Ecuador bought twenty-four Super Tucanos for training and border patrol missions.
Perhaps due to the growing commercialization of Embraer’s production line, Jane’s Defense Weekly reported in March 2009 that Colombia expressed interest in co-developing Embraer’s C-390 medium-heavy transport aircraft. In 2008 there were also reports that Bolivia was interested in acquiring Super Tucanos to replace its venerable but aging T-33 trainer/light attack aircrafts scheduled to be retired in 2010.
Working with government institutions, Embraer and Banco Nacional do Desenvolvimento Econômico (BNDE), Brazil’s state-run export financing institution, supplied Guatemala with a $99 million loan to purchase an anti-drug trafficking system. The catch is that Guatemala will appropriate the funds advanced by the Brazilian government to purchase a radar system and six Super Tucanos. The deal was announced in June 2009 when Brazilian President Lula da Silva visited Guatemala.
For CONACYT fellow Guevara, “Embraer has focused on emerging markets such as Latin America, as well as North Africa and the Middle East, which are its natural clients; it also managed to penetrate NATO markets, such as France, Greece and the UK.” France may be an obvious development, given its great interest in becoming a close ally of Brazil in recent years. On the other hand, for Dr. Costa, “the decision to buy Embraer products seems to show clear attention to cost components and less of political alignment.”
What remains to be seen is how the U.S. will respond to Embraer as a direct competitor with American military suppliers. In 2008, EP Aviation, a subsidiary of Blackwater Worldwide/XE, the world’s largest private security contractor, purchased a Super Tucano. The aircraft, which was sold to EP Aviation, did not include the two .50mm-caliber machine guns that are normally wing-mounted. In 2008, there was talk of preliminary negotiations with U.S. authorities regarding the purchase of eight Super Tucanos which would be sent to Iraq for training purposes.
One more reason why Brazil is a rising global power
According to Guevara, “Brazil has the region’s most advanced and developed defense industries. Over the past two decades it has focused on developing efficient support equipment but now it is interested in developing heavier conventional capabilities. Submarines, armored personnel carriers and fighter jets are among its main requirements.” Meanwhile, COHA’s Burges notes “if you have planes and the other doesn’t, you have air superiority, it is all a question of relative capability.” Embraer rose in recent years as a very important military and civilian aircraft manufacturer of efficient and affordable products. Developing nations will most likely continue to see the Brazilian company as an increasingly important and diversified weapons’ supplier for the immediate future. In the greater scheme of things, Embraer’s success, current financial issues aside, is another propellant that will elevate Brazil to a higher level of importance, as it continues to evolve into an ever more influential regional player and growing world power.