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Group A6 – Strategic Audit

Group A6 – Strategic Audit. Rachelle Topacio. Erik Bronger. Julien St Girons. Uday Mudholkar. Dimitri Koufos. Patrick Wiebusch. Introduction So...what do Ronaldo and the “Cristo” of Rio de Janeiro have in common?.

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Group A6 – Strategic Audit

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  1. Group A6 – Strategic Audit Rachelle Topacio Erik Bronger Julien St Girons Uday Mudholkar Dimitri Koufos Patrick Wiebusch

  2. IntroductionSo...what do Ronaldo and the “Cristo” of Rio de Janeiro have in common?

  3. Short Profile Empresa Brasileira de Aeronáutica - EmbraerEmbraer is active in aircraft manufacturing and related services Revenue Share (2003) Source: Embraer

  4. Overview Embraer (Timeline)The introduction of the ERJ145 was the single most important event in the history of the company • Founded in 1969 • Maiden flight of Ipanema in 1970 1971-1980 1981-1990 > 1990 • 1971 – First flight of ground attack aircraft – Xavante • 1972 – Delivery of first EMB110 to Brazilian Air Force • 1976 – First flight of EMB121 • 1979 – Foundation of Embraer Aircraft Corporation (EAC) • 1983 – First flight of EMB120 • 1985 – First flight of AMX • 1990 – First flight of CBA123 • 1995 – First flight of ERJ145 • 1997 – Foundation of Embraer Australia • 1998 – First flight of ERJ135 • 2000 – Opening of Beijing Office, First flight of ERJ140 • 2001 – 400th ERJ145 delivered, First flight of Legacy • 2002 – 600th ERJ145, First flight of ERJ170 Source: Embraer

  5. Comments • High-tech company coming from a developing country • Major contributor to Brazilian economy - 2nd largest exporter • High market share growth – 30% increase in 5 years • High profit growth – CAGR 240% Why Strategic Audit of Embraer?Although originating form a developing country, Embraer is able to compete successfully in a high-tech market Contradiction? Cliché Developing country High tech market Market Share and Profit development Embraer Market Share in % Profit in M$ years Source: Embraer

  6. Embraer’s Relevant Market Segment Embraer competes with only one other competitor Bombardier in the regional jets market Airline Market (Number of airplanes 2001) Regional Aircraft Market • Categories of airplanes • 100 to 120 seats • 80 to 99 seats (jet) • 60 to 79 seats (jet) • 40 to 59 seats (jet) • 20 to 39 seats (turbo prop) • Competitors regional market1 • Embraer • Bombardier Twin-Aisle Regional Single-Aisle 747 or bigger Source: Embraer; Harvard Business School Case 9-703-022 1 Only competitors in regional jet market, not included competitors of turbo prop market

  7. Free Trade Area of the Americas - FTAA CANADA ACCOUNT PROEX Market PeculiaritySubsidies are a pervasive problem for international trade and economic development • Aircraft: “Dual Use” • Boeing – Airbus • Pressure for Political Intervention – Aftermath of 9/11 • Brazil and Canada accuse each other of unfair trade practices Precarious position of airline industry will necessitate public financing Source: The Bombardier-Embraer Dispute and its Implications for Western Hemisphere Integration, CSIS, 2003

  8. Market Share Comparison Bombardier and EmbraerIn the late 1990s Embraer overtook Bombardier in terms of market share; since than it is the biggest regional jet manufacturer in the world Market Share (Embraer vs. Bombardier) Embraer Bombardier Market Share in % Years Source: Embraer; Bombardier; Harvard Business School Case 9-703-022; SoZ - Sozialistische Zeitung Nr.05 vom 01.03.2001, Seite 9 “Kampf um Privatjets- Kanada: Mit der WTO gegen Konkurrenten“

  9. Embraer’s Profit EvolutionEmbraer took off after the new CEO Mauricio Botelho took over in 1995 and shortly afterwards introduced the new ERJ-series of regional jets Profit Growth (Embraer) September 11 Introduction ERJ-135 Privatization Embraer and appointment new CEO (M. Botelho) Afghanistan invasion Iraq war Implementation of Real plan. Brazilian currency unit pegged to USD within predetermined band Profit in M$ years Introduction ERJ-145 • Significant reduction on new • aircraft deliveries: • Reduction of 35% since 2001 peak • Recovery expected for 2005 Introduction of ERJ-series 37,000% increase in inflation over this period Source: Embraer

  10. High Technology Flexibility Qualified People Airline Industry Fundamentals Cash Intensiveness Global Presence FrameworkThe airline industry is characterized by five industry fundamentals Source: Embraer

  11. CAD CAM CAE CFD Industry Fundamentals – High TechThrough the deployment of high-tech applications Embraer was able to reduce its development time and manufacturing costs significantly Concurrent Engineering Electronic Mock-up Flight Simulators Virtual reality Center Example: ERJ-170/190 • Developing time reduced from 60 to 38 months • Cost savings in manufacturing between 5% and 10% • 50% reduction of allocated personnel • Savings of $3M Source: Embraer

  12. Embraer’s Continuous Employee Development System 2-year in-house MBA program focused on international aviation $96 million investment in last 5 years in training and development of all personnel 3 1 2 18 months course in aeronautical engineering for all hired engineers Industry Fundamentals – Qualified PeopleEmbraer’s success is fundamentally linked to its highly educated workforce 1% PhD or Masters 4% Graduates 30% College Undergraduates 65% High School Graduates 25% of employees are engineers Source: Embraer

  13. Industry Fundamentals – Global PresenceGrowing foreign markets and an increasing need to seamlessly serve customers necessitate a global presence Market Forecast 2023 for 30–120 Seaters: 8,450 jets Europe, Middle East & Africa 23% 56% 8% USA, Canada China Asia Pacific 7% Latin America & Caribbean 6% Embraer has operations in Brazil, USA, Europe, Asia and Australia Number of employees per region: 12,086 482 189 165 10 09 Source: Embraer

  14. Straight loan Operating Lease Brazilian Government buy down of 3.8% Capital Markets Leveraged Lease Financing Lease Industry Fundamentals – Cash IntensivenessAirline industry is in a weak financial position • Five sources of funding • WTO: Subsidies and Countervailing Measures • PROEX: Government interest equalization financing program Source: Bombardier “Canada versus Brazil at the WTO, Harvard Business School Case 9-703-022, 2003

  15. P1 P2 P3 P4 Product Worker Worker Lead time - 4.6 months Number of months Industry Fundamentals – FlexibilityEmbraer created a flexible production process that allowed faster delivery times Old process New process Line Assembly Dock Assembly Source: Embraer

  16. Deltas Δ Value: • High technology Δ Cost: • Flexible production process • Low labor cost (developing country) • Strategic partners (risk sharing) Δ Speed: • Flexible production process • High technology Value, Cost and SpeedBy excelling in all of the five industry fundamentals Embraer is able to beat the competition in terms of value, cost and speed CUST- OMER Value/ Speed Value/ Speed COMPANY COMPE- TITOR Cost/ Speed Source: Prof. Dr. Horst Bender, Rotterdam School of Management, 2004; Embraer

  17. Value, Cost and SpeedEmbraer’s superiority in value, cost and speed is underlined by the following three case examples Value: Operating Costs1 ($M) Bombardier $M 0,2 Embraer Cost: Reference Price2 ($M) Bombardier $M 3,4 Embraer Speed: Lead time (months) 3 Bombardier 1,6 months Embraer Source: Embraer 1 Operating costs equal to total trip costs for a distance of 500 nautical miles 2 In the nature of a list price; most planes are sold at discounts to this price 3 Estimation Note: The operating costs and the reference price refer to Embraer’s ERJ145 and Bombardier’s CRJ-200

  18. Industry OutlookMajor factors affecting the regional airplane market Strong growth Boeing& Airbus entering market Right size aircraft capacity Regional Airplane Market Liquidity problem Others Geo-political world tensions Source: Boeing Commercial Airplanes Current Market Outlook, 2003; Federal Administration of Aviation (FAA) “Regional jets reshape a dynamic industry”, 2001

  19. 32,495 17% Regional +7% 57% Single-Aisle 15,271 Number of aircraft 10% -8% 65% 22% Twin-Aisle +4% 18% 747+ Industry OutlookThe regional jet market is the strongest growing segment – until 2021 it is expected to grow from 1,500 to 5,500 aircraft Market share aircraft segments – Worldwide Regional Jet Network – USA 1995: 76 Routes 2004: 2,224 Routes Market share regional jet market: +7% Source: Embraer

  20. Strengths Weaknesses • System integrator • Know-how in design and service • Outsourcing/ risk sharing partners • Low labor costs • Flexible/ innovative production process • Synergies through product families • Market intelligence • Located in Brazilian “Aeronautical Brain Park” • “National icon” • Extensive investment in HR • High dependence on the US market • Weak financial strength • depends on partners to fund projects • Single core business • Reliance on Brazilian government • Follower • Bringing new products to market Opportunities Threats • Growth of regional jet market • Growth of low cost airlines • Overall aircraft market growth • Growing aircraft replacement market • Brazilian defense contract for fighter jets • Transfer of intelligent defense systems to naval and ground-based applications • Boeing and Airbus entering regional jet market • New entrants from emerging markets in commercial and military aircraft market • WTO politics - Embittering of subsidy conflict • Unstable economic environment • Terrorism • Global Diseases (e.g. SARS) • Substitutes • High speed trains • IT SWOT-AnalysisIn summary… Opportunities Strengths Weaknesses Threats • Growth of regional jet market • growth of low cost airlines • Overall aircraft market growth • growing aircraft replacement market • Brazilian defense contract for fighter jets • Transfer of intelligent defense systems to naval and ground-based applications • System integrator • Know-how in design and service • Outsourcing/ risk sharing partners • Low labor costs • Flexible/ innovative production process • Synergies through product families • Market intelligence • Located in Brazilian “Aeronautical Brain Park” • “National icon” • Extensive investment in HR • High dependence on the US market • Weak financial strength • depends on partners to fund projects • Single core business • Reliance on Brazilian government • Follower • bringing new products to market • Boeing and Airbus entering regional jet market • New entrants from emerging markets in commercial and military aircraft market • WTO politics - Embittering of subsidy conflict • Unstable economic environment • Terrorism • Global Diseases (e.g. SARS) • Substitutes • High speed trains • IT SWOT

  21. Implications for EmbraerThere are four major implications which should be addressed by Embraer • Maintain competitive advantage in the face of Boeing and Airbus entering the regional jet market • Rely on core competencies (innovative technology, extensive training of employees, flexible production process) • Aggressively improve time to market by applying more efficient management practices • Decrease dependency on US market through aggressively developing and creating new European and Asian markets • Improve financial position in terms of funding their development programs since competitors have huge financial advantage • Gain access to additional capital markets (e.g. LSE) • Reduce dependence on aircraft business through diversification in related activities • Supplying parts and systems to space programs (NASA, ESA) • Logistics consulting • Software development

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