IBSA and the Aerospace Industry in Brazil

1. IBSA and the Aerospace Industry in Brazil Mario Marconini South-South Economic Cooperation: Exploring IBSA (India-Brazil-South Africa) Initiative Johannesburg, 28 June 2006

2. Trade Balance – 1950-2004 IBSA Aerospace Joburg 28.06.06

3. Trade as part of GDP • Brazil: no longer the least open • Similar to high-GDP countries; or, • Countries notoriously closed; • 1.7 times more closed than the world average • 2.2 times more closed than Mexico; • 2 times more closed than China; • 2.75 more closed than Canada Source: The World Bank, WDI Data Query IBSA Aerospace Joburg 28.06.06

4. Regional Trade Flows, 2004 IBSA Aerospace Joburg 28.06.06

5. Trading Partners IBSA Aerospace Joburg 28.06.06

6. Brazil-India IBSA Aerospace Joburg 28.06.06

7. Brazil-India IBSA Aerospace Joburg 28.06.06

8. IBSA in relative terms IBSA Aerospace Joburg 28.06.06

9. Brazilian Aerospace Sector • Aeronautics - 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 IBSA Aerospace Joburg 28.06.06

10. Brazilian Aerospace Sector • One of most dynamic sectors • Direct relationship with national security; • High technological linkages and spillovers; • One of the country's main exporters; and, • Productivity levels and growth perspectives. IBSA Aerospace Joburg 28.06.06

11. Brazilian Aerospace Sector IBSA Aerospace Joburg 28.06.06

12. Brazilian Aerospace Sector IBSA Aerospace Joburg 28.06.06

13. Brazilian Aerospace Sector • 1941 – Ministry of Aeronautics • 1945 – Idea of a Aeronautical Technological Center (CTA) • 1946 – Organizational Commission • 1947 – Military Engineering in Rio transferred to São José dos Campos • 1950 – First ITA class • 1954 – CTA created, also Research and Development Institute (IPD) • 1969 – Embraer created as state-company • 1971 – Bandeirante and air force contracts start • 1975 – Embraer first export: Uruguayan Air Force • 1979 – Embraer: presence in the U.S. • 1983 – Embraer: presence in Europe • 1990 – Embraer major financial crisis; downsize 13 to 9.9K employees • 1994 – Privatization of Embraer IBSA Aerospace Joburg 28.06.06

14. The Embraer Phenomenon • Empresa Brasileira de Aeronáutica • 13,000 direct, 3,000 indirect of 18,000 jobs • 80% of aerospatial MSMEs’ revenues • Virtually all integrated with Embraer chain • 11 service suppliers formed a venture • Embraer and partners in aeronautics and defense • Only space: Orbisat and Orbital • Multi in helicopters: Helibras IBSA Aerospace Joburg 28.06.06

15. The Embraer Phenomenon • High R&D, strategic partnerships, government support • Main thrust of restructuring: integration into international market for regional jets • Biggest Brazilian exporter in 1999-2001: over $2 billion • Four market segments: • Commercial: 37-50 seater and 70-106 seater • Corporate: private jets • Defense: same ERJ-145 platform for intelligence, surveillance, reconnaissance • Services: after-sale, replacement parts, maintenance • Commercial aviation: 70-80% of total revenues IBSA Aerospace Joburg 28.06.06

16. 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 IBSA Aerospace Joburg 28.06.06

17. The Embraer Phenomenon IBSA Aerospace Joburg 28.06.06

18. The Survey • Second semester of 2005 • 12 firms contacted • Distrust with the project • Additional information and clarifications • Linkage of project to government • Sources of financing for the research • Recourse to high technology • Economic relevance: Embraer alone IBSA Aerospace Joburg 28.06.06

19. The Survey IBSA Aerospace Joburg 28.06.06

20. Survey Findings: General • Positive impression re: industry future • Need to attract world-class suppliers • Space less developed than India or China • Develop indigenous technology • ½ traded with India or South Africa • Exports: dynamic developed markets • Imports: quality of products • Supplying firms: need for certification IBSA Aerospace Joburg 28.06.06

21. Survey Findings: General • Aviation systems: oligopolies • Alternatives in India and Russia • Little prospecting yet • ¾ never heard of IBSA • ¼ heard of it but highly skeptical anyway • Embraer: exports to both • Aeromot: sales to S.A. but not India • Orbisat: sales to S.A. but not India • None see significant increase in IBSA business IBSA Aerospace Joburg 28.06.06

22. South-South Cooperation • ½ – cooperation projects • China – CIBERS satellite • Russia – satellite launchers • ½ – France and Germany • ¼ - knew of India project • ½ – considered infeasible with IBSA • Embraer already has global network • Better to have productive chain at home IBSA Aerospace Joburg 28.06.06

23. South-South Cooperation • Space 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 subsidies • Technical barriers, not a problem • Exception: emissions and noise in E.U. • IBSA for bargaining technology transfer • Financing crucial: government could help to provide level playing field • Country Image: Embraer’s effect IBSA Aerospace Joburg 28.06.06

24. Capabilities • Embraer: long-haul market would be a "suicide“ • Significant political incentives • Radars, detection of oil spots in S.A. ocean • Political blockage: Brazilian government crucial • Lack of funding, interest, priority • Orbisat: Radars in Embraer’s aircrafts • Market access, doing business in India • Difficult to comprehend, decision-making hierarchies, corruption • Infrastructure: governmental support, unavailable funds • R&D: deficient in geostationary satellites and launchers • Lack of investment in higher education • High interest rates and short loan duration • Embraer: distances and freight not important • Technical requirements and high values and quantities, very important • Orbisat: effective partnership with India: satellites and radars • Lost to Israel in India due to lack of presence and contacts in Indian government IBSA Aerospace Joburg 28.06.06

25. 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 swaps • Only in defense and space – not aeronautics IBSA Aerospace Joburg 28.06.06

26. Government Involvement • Skepticism • Do internationally what has not been done internally • Yet, • Project in defense and space • Financing at competitive rates and durations • Nationalization of segments • Intermediaries with foreign governments • Stimulate small enterprises in specific projects • Create special entity or regulatory agencies • Presidential visits: events, fairs and commercial visits, more beneficial IBSA Aerospace Joburg 28.06.06

27. Threats • ¼ - IBSA cannot improve bargaining • ¾ - IBSA cannot replace the developed • ½ - IBSA cooperation – improbable • ½ - IBSA technology transfer feasible • ½ - IBSA technology transfer irrelevant IBSA Aerospace Joburg 28.06.06

28. Ten Conclusions • Brazil’s sector integrated into the world • Little to gain in aeronautics • Cooperation only in defense and space • Long-haul is really a “long-haul” shot • India seen as very difficult for firms • Skepticism re. government initiatives • Better to nationalize world-class production • Government can support and mediate • IBSA cannot change the developed • IBSA cannot replace the developed IBSA Aerospace Joburg 28.06.06