COMPETITION & CHANGE, Vol. 11, No. 4, December 2007 329–347
Take Off and Crash: Lessons from the
Diverging Fates of the Brazilian and
Argentine Aircraft Industries
ANIL HIRA1 and LUIZ GUILHERME DE OLIVEIRA2
1
Department of Political Science , Simon Fraser University, 8888 University Drive,
Burnaby, BC Canada V5A 1S6
2
Universidade de Brasilia
What are the factors that allow for success or failure of developing countries’ attempts to
enter high-tech sectors? We make a initial attempt to answer that question through a comparative study of success and failure in manufacturing aircraft. Aircraft production is one of
the key industries in the world today, as reflected in the intense Boeing-Airbus rivalry. It is
also one of the most cyclical, technologically-sophisticated, and capital-intensive industries,
and therefore an unlikely place for a developing country to compete. But almost from the
birth of modern commercial aircraft manufacturing, Argentina’s Fábrica Militar de Aviones
(FMA) was at the forefront of production. Brazil’s aircraft industry was tiny in comparison
at that time. Yet, by the 1990s, Brazil’s Embraer had become the world’s third largest
aircraft manufacturer, while the Argentine aircraft industry has virtually disappeared. We
examine the history of each company to explain the differences in trajectories and their fates.
Our analysis demonstrates that an evolutionary but consistent partnership between state
and firm, one attuned to both the exigencies of sectoral development and to changes in the
nature of global markets, is necessary for success.
Industrial policy, Technology policy, Technology transfer, Development,
Aerospace, State–firm relations, Argentina, Brazil
KEY WORDS
Introduction
In 2000, a very unusual case came to the attention of the World Trade Organisation (WTO)
dispute resolution panels, the case of Bombardier of Canada versus Embraer of Brazil.
More than the dispute itself, the case marked a unique development: the rise of a company in
Latin America that can compete head-to-head with any other company in the world in the
high- technology, high value-added sectors. Today, Embraer, a Brazilian company, successfully competes with the behemoths of the industry located in the developed world, including
Boeing and Airbus. The same time period saw the dismantlement of the Argentine aircraft
company, the Fábrica Militar de Aviones (FMA), that had once been the fifth largest in the
world, was organized earlier and had a technological lead on Embraer. This article provides
new information that compares these two companies. The key lesson from this article
concerns the nuanced evolutionary but still crucial role of state promotion of new industries
E-mail address: ahira@sfu.ca, guilhermeoliveira@yahoo.com.br
© 2007 the Editors and W. S. Maney & Son Ltd
DOI: 10.1179/102452906X239501
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and key companies. The complexity of such evolution cautions against a coherent success
narrative that fails to consider the dynamic role of states and markets, institutions and
personalities, and preparedness for taking advantage of opportunities. This article relies
upon extensive field research including first person interviews and archival government
and company documents in order to reflect appropriately the complexity of the evolving
relationship between state and firm.
The Daunting Challenges for Developing Countries to Compete in the World Economy’s
Commanding Heights
By most standard accounts of development, indeed by the very definition of development,
developing countries should not be able to compete with developed countries in advanced
products, which are not in its comparative advantage. From both the dependency and
market supremacy perspectives, the role of the state is inimical to the processes of development. Yet, there are a number of reasons to be skeptical about this conclusion. The foremost
is the wide array of protection and ‘cascading tariffs’ against commodities and finished
products of commodities (Oxfam 2002). The protection in the North is on top of the hazards
endemic to commodities, such as wildly varying prices and natural hazards. Even in commodity production, developing countries tend not to be able to capture the value-added
steps. They export the unrefined copper, not the end products.
This would suggest that developing countries should make a concerted effort to industrialize in order to diversify. This was an idea openly espoused in Latin America from the
1940s (Hira 1998). However, where developing countries attempt to produce advanced
goods, they have often met with failure. For example, Chile, Indonesia, and Malaysia have
all tried to produce automobiles. Brazil tried to produce its own personal computer industry
in the early 1980s. These attempts show a ‘learning curve’ exists beyond the heavy production quotas of the post-Second World War Soviet Union and Indian planning models for
increasing total industrial production. Gains in raw industrial production did not lead to
higher welfare for the local citizens or industries that were anywhere near as efficient as
international counterparts in the West. This led to the current neoliberal period of strong
skepticism about the efficacy of the state in industrial leadership, and a renewed emphasis
on foreign direct investment as a means of development and technology transfer.
Nonetheless, the example of success in East Asia under state leadership over the past
three decades warrants the consideration that other developing countries could move up the
value-added ladder into more sophisticated production if their state policies were oriented
towards developing export industries as a form of dynamic comparative advantage
(Amsden 1989; Hira 2007). The case for state intervention is made even more strongly?
when we consider that whilst the US and Europe may espouse free trade for developing
countries, they intervene in a wide variety of ways to preserve their production in key
oligopolistic sectors, such as steel, computers, and automobiles, including protection,
subsidies, and regulatory favoritism (Hira 2003). If we include the advantages of more
advanced infrastructure, including educational and health systems, the hurdles for developing countries to capture dynamic comparative advantage appear very high. The argument
is frequently made that increasingly globalized modular production means that the age of
supporting ‘national champions’ is over (Friedman 2005).
A developing country seeking to enter high-tech/high-value-added sectors also faces
the enormous disadvantages of the following: volatile macroeconomic conditions; political
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instability; limited domestic markets; shallow financial markets; and, an inability to
subsidize research and development or even higher education. The odds and conditions,
then, of a developing country being able to compete in a high-tech sector as an OEM
(original equipment manufacturer), especially one that requires high economies of scale,
dynamic production processes, and sophisticated marketing and distribution, seem
extremely low. Yet we are beginning to see successes – Korean success in autos and electronics and South Indian success in software. Perhaps the most intriguing case in terms of
the level of sophistication required is that of Embraer. In both the cases of FMA and
Embraer, the state was ubiquitous. Yet, Embraer was only considered a success after
privatization. The rest of this article addresses two questions: (a) did the state hurt or hinder
high-tech industry development? Can we conclude that no state intervention would have
been optimal?; and (b) do differences in the nature of state–firm relationships between the
two cases help to explain the different outcomes?
The Strategic Importance of Aircraft Production
Aircraft production is not only one of the most technologically complex sectors, requiring
heavy financial investment and suffering from business cycles, but it is also incredibly competitive and heavily protected by Northern countries. It is an important source of developing advanced technological applications and also in regard to the backwards and forwards
linkages and supporting high levels of well-paid employment. There are clear links between
the development of military and civilian aircraft, indeed most of the major companies
produce both. In this sense, the larger nations see a domestic aircraft industry as integral to
their defense plans. In terms of the constant need to outclass potential military enemies,
then, the aircraft industry has always relied upon heavy state subsidies in order to continue
to improve technology. Aerospace is also linked to several key industries, including
electronics, information technology and telecommunications (Mowery 1987: 37).
The need for state protection and aid is compounded in the civilian industry by the
‘lumpy’ aspects of the product market. Aircraft production requires enormous economies
of scale and sophisticated supply lines, and therefore tends towards a natural oligopoly.
Aircraft production requires a highly skilled and concentrated workforce. On the demand
side, the airline service providers face enormous payments for aircraft in comparison with
their often volatile and small-scale revenue stream from flying customers, based on the presence of conflict and business cycles. The development of new aircraft is therefore a highly
capital-intensive and risky venture. Thus, military orders have been key to maintaining
basic stability in the US aircraft industry. Moreover, given the agglomeration of jobs
and linked industries, aircraft manufacturing has been linked to the health of regional
economies, such as Boeing in Washington State, sometimes using ‘offsets’ (Pritchard &
MacPherson 2004).
The competitive factors in the passenger civilian aircraft industry can be summarized as
follows, in no particular order:
•
•
•
there is the need for constant technological upgrading and innovation,
there is the enormous capital investment required for both setting up and maintaining
production, and therefore the question of the availability of financing,
there is competition in fuel economy delivered,
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•
•
•
A. HIRA and L. G. DE OLIVEIRA
there is a question of quality related to the expense of maintenance, spare parts and
repair,
there is also the factor of speed, with the Concorde being the most important example of
an attempt to differentiate on this factor,
the cost of inventory is a final major competitiveness factor.
In sum, the financial, technological, and managerial aspects of this industry are quite
daunting.
Much of the motivation to build an aerospace industry in the developing world comes
from defense-oriented anxieties and the desire to avoid relying on outside technology (Todd
& Simpson 1986: 15). There have been some notable experiments in native aircraft development, for example in Indonesia and China (Hayward 1994: 32–41). However, Embraer
remains the unique success in the developing world, in stark contrast to its Argentine counterpart. In answering these questions, we trace out the role of state–firm relations during
the evolution of the two companies.
History of Embraer
Stage 1: Creation of Embraer
During the 1930s and 1960s, we see three important aspects. In the earliest period, a private
sector based on operating foreign-made planes and kits begins to arise; however, it is far too
limited for the domestic market. In the second phase, the government steps in to provide
research and development support for private industry. This also yields slow and halting
progress. In the third phase, the frustrated Government steps in to create its own company,
Embraer.
With its vast distances between regional poles of development, Brazil has a natural
market for aircraft. With that in mind, the Government set up the military-run Centro
Técnico Aerospacial (CTA) in late 1945 to develop applied aeronautics research and education, modeled on MIT, under the guidance of MIT Professor Richard Smith (Botelho 1999).
Brazilian firms have built military and civilian aircraft from the 1930s, however Bertazzo
notes that through much of the early period of its development (the 1920s to 1950), the
Brazilian aircraft industry was not economically viable. Bertazzo notes that many local
private and public purchases were of US planes, on concessionary terms, in return for
Brazilian cooperation during the Second World War. Moreover, planes manufactured
by private companies in Brazil were not technically viable, leading to losses and a lack
of confidence when government procurement began to seek to support local industry
(Bertazzo 2003).
The Aeronautical Technology Institute (ITA) was set up by the Government in 1950 to
address these issues. The ITA trained aeronautical engineers, and the IPD (Instituto de
Pesquisa e Desenvolvimento de Centro Técnico Aeronáutico), a research and development
wing, was created to house 50 German aeronautical engineers hired after the Second World
War in 1954, to work on applied aeronautical research. According to Botelho:
[A] ‘can do’ attitude in technological research with a scientific base implemented by the ITA
by researchers trained in MIT, was responsible for the major technological programmemes
pursued in the 1960s and 1970s (aeronautics, information technology, microelectronics and
space) [translation my own] (1999: 39).
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These included designs for an aircraft completely made in Brazil as early as 1965 (Silva 2005:
139). Despite building the human capital base, progress, dependent upon collaboration with
the domestic private sector, was slow. The two remaining companies, Aerotec and the
Instituto Aeronáutico Neiva, relied exclusively on government contracts as their weak technical capability prevented success in civil aviation (Bertazzo 2003). Moreover, Bernardes
highlights that there was an ‘a-synchronicity’ of government policies, which did nothing to
protect the nascent manufacturers from foreign competition or provide access to adequate
financial resources (Bernardes 2000).
With limited design and no large-scale manufacturing capability in aircraft in spite of
extensive investments, the frustrated government created Embraer (Empresa Brasileira de
Aeronautica) in 1969, with the Bandeirante as the central project. Embraer was created as
a mixed private–public enterprise, with the government holding a 51 per cent stake and
CTA leading the push for manufacturing of its plans. CTA was motivated by US restrictions on military aid and weapons sales following the military coup in 1964. The Brazilian
government provided high tariff protection throughout the 1960s and the military bought
almost all of the planes. Besides military procurement and tariff protection, Embraer was
exempted from paying a number of taxes and duties normally levied upon private companies. Brazilian corporations were allowed to invest up to 1 per cent of the income taxes
they owed each year instead into Embraer shares, providing a much needed infusion of
capital (Abdelal et al. 2003: 8–9; Ghemawat et al. 2000: 2; Hayward 1994: 33; Mowery 1987:
112–117).
Stage 2: Embraer as a State-owned Enterprise (SOE)
In this period of its evolution, Embraer as an SOE developed a high level of technical
capacity, but struggled to develop financially viable products. Strategic decisions by
management as well as exigencies for financial independence in an increasingly chaotic
macroeconomic situation led it to move away from military aircraft and towards commercial exports. The need to develop competitive technology pushed it into international
agreements. State support included purchases and protection.
In 1971, Embraer developed the Xavante, a jet trainer and attack aircraft assembled
under a licensing agreement with the Italian company Aermacchi to fulfill a Brazilian
military order. In 1972, Embraer introduced the Ipanema, an agricultural spray plane developed by the IPD. In 1973, Embraer developed the Bandeirante, a 19-seat turboprop plane,
from an IPD design, of which it eventually sold 500. The Brazilian military was the primary
customer for most of the Bandeirantes, signing the first contract for delivery of 100 planes in
1970. Ozires, the former CEO, states that the atmosphere in Embraer was one of a strong
sense of activity and mission, as if a ‘revolution’ were about to take place. He also states that
Embraer realized by 1973 upon entering the civilian market that it would have to concentrate on a few key products in order to be able to compete, and that Embraer would have to
‘convince’ the government, society, and its partners that it was effective to succeed (Silva
2005: 271, 279, 333, 369). In a sense, the military guaranteed Embraer a learning curve and
testing ground for its planes, not unlike some of the early protectionism used in East Asia to
aid their manufacturers. In fact, the Brazilian government as a whole at one point insisted
that all public sector planes had to be purchased from Embraer, and all travel should take
place on Embraer planes.
At some point in the 1970s, Embraer made the strategic decision of orienting itself
towards exports. Bernardes states that in 1975, only 5 per cent of Embraer’s production was
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exported, a figure that would rise to 53 per cent by 1980 and 60 per cent by 1994 (Bernardes
2000). Embraer relies upon foreign parts including engines; an estimated 60 per cent of
Bandeirantes were produced domestically. At the same time it produced small one and two
engine commuter aircraft under license from Piper. Goldstein points out that the Piper
agreement was a reflection of the need to gain access to foreign technology. The Brazilian
Government used the threat of import duties to incentivize Piper into producing the kits for
its initial production (Goldstein 2002). The Piper agreement as well as joint production of
military aircraft, including agreements with Northrop in 1974 for production of an F-5, led
to a transfer of production, but not engineering and design technologies. Ozires states that
Embraer realized that partnerships with foreign companies could be useful for gaining
access to Northern markets (a quasi-offset and aid in licensing hurdles) (Silva 2005: 169).
Undoubtedly, the partnerships helped to establish the quality of the product as well.
Timing and government support were both key for the early success of the Bandeirante,
which coincided with a growing demand for commuter aircraft. The Brazilian Air Force
order in 1970 was crucial. Ozires notes importantly that, despite this early dependency,
Embraer’s relationship with the Air Force was always at arm’s length, and a strong personal
level of confidence arose between him as CEO and Air Force officials. In fact, through
a strong initiative on the part of the Minister of Aeronautics, Lt. Brig. Joelmir Araripe
Macedo, the Bandeirante was converted to civilian use and the first sales to domestic
carriers VASP and Transbrasil were facilitated. The ability to sell the planes transformed
the initial trepidations about entering the civilian market in the company to an attitude of
confidence. (Silva 2005: 474, 299, 310–312). Several years were spent struggling to gain
access to export markets, for which licensing is key. After the valuable experience of
‘proving’ its planes in the domestic market, Embraer was able to export to Uruguay and
Chile in 1976. The Bandierante was finally certified by the FAA in 1978.
Embraer had no knowledge of marketing. As Ozires tells, the solution came when Bob
Terry, the owner of Aero Industries and owner of Mountain West Airlines, upon hearing of
Embraer’s frustrations, offered to be its sales representative and purchased the first planes
for his own airline. This opened Embraer up to the networks of airline executives; however,
the lack of local maintenance and customer support remained a severe impediment. This
pushed Embraer to set up a US subsidiary and maintenance facilities in Fort Lauderdale,
Florida, which set up a learning curve for that aspect of the business that was subsequently
mirrored in Europe (Silva 2005: 393–407). Bandeirante sales in the US jumped from 5 (1979)
to 39 in 1981. Embraer captured of 46 per cent of the international commuter turboprop
market. As a result of the success of the Bandeirante, Fairchild, the former market
leader, filed a complaint before the US International Trade Commission requesting a
countervailing duty of 39–44 per cent to offset Brazilian government subsidies. The legal
case dragged on for two years, and cost Embraer millions in legal fees (Silva 2005: 412);
however, the request was denied. By 1984, Embraer had managed to sell a total of 130
Bandeirantes to the US alone, and had other sales around the world.
Embraer also introduced the Xingu, a pressurized corporate aircraft, in 1977, but it was
a commercial failure and was dissolved in 1984 (Abdelal et al. 2003: 8–9; Ghemawat et al.
2000: 2; Hayward 1994: 33; Mowery 1987: 112–117). Success in the military field helped to
establish Embraer’s reputation; the British Air Force order of 130 Tucano trainers in 1985
was a major breakthrough (Silva 2005: 502). Also in 1985, Embraer introduced the Brasilia
(EMB-120), a 30 passenger turboprop, whose design began in 1979 (Silva 2005: 296). From
1985–1999, Embraer managed to sell 350 of the Brasilia aircraft. The Brasilia was a highly
successful venture, at one point capturing 26 per cent of international market share for
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commuter planes. As a turboprop, it was attractive, using less fuel than jets. However, there
were questions about whether the market share success was matched by financial performance (Abdelal et al. 2003: 8–9; Ghemawat et al. 2000: 2–3). Providing financing for
customers is a huge part of the business, and the US Ex-Im Bank and its European counterparts provide a major competitive edge to their home producers. The role of the National
Development Bank (BNDES) was crucial in financing sales for Embraer, given the weak
state of Brazil’s financial system, currency and inflationary crises, and lack of access to
commercial credit (Silva 2005: 301, 470).
Stage 3: Embraer’s crisis
Despite achieving international recognition for quality production, Embraer experienced a
major crisis in the early 1990s that unhinged state leadership. Embraer’s sales dropped from
$700 million in 1989 to $177 million in 1994 (Abdelal et al. 2003: 9). Embraer was further
affected by the post-Gulf War slump in the market after 1991, and enjoyed a $407 million
rescue package from the government. (Hayward 1994: 33) As part of the new MERCOSUR
free trade agreement with Southern Cone countries, Embraer agreed to develop the CBA
123 plane with Argentine help. The Argentines would provide 33 per cent of the financing
and technical support for key components (Halbritter 2004: 434–435). The CBA 123 was a
shorter version of the Brasilia with just 19 seats. The project was a major failure, accumulating losses of $280 million by 1990 (Ghemawat et al. 2000: 3). According to Bernardes, the
planners of the plane never closely examined the market requirements for success. Though
the plane was technologically advanced, its asking price of $6 million was well above the
market price of $4.5 million for planes produced by competitors Beech 1900 and Jetstream
(Bernardes 2000). In a sense, the CBA 123 was a technical triumph but a business disaster.
The 1980s debt crisis hit the Brazilian macroeconomy hard, with five-digit inflation
resulting by 1990. Despite drastic workforce reductions from 13,000 to 6,100 average losses
in the early 1990s exceeded $200 million per year (Ghemawat et al. 2000: 3). With the rise of
neoliberal policies under the Cardoso government, privatization of Embraer came to be
seen as an important part of the overall goal of reducing fiscal deficits.
Conditions of Privatization
Privatization was delayed by two years due to national protests. Privatization was supported by the president of the company, Ozires Silva, who had been brought back (after
leaving in 1986) to turn around the company. Embraer was finally privatized in 1994. The
Brazilian Congress added a restriction on layoffs for the first 6 months, creating an estimated additional cost of $45 million to the new owners. The state assumed $700 million of
debt, recapitalized another $350 million, set a low reserve price in the company’s shares, and
allowed partial payment in bonds that traded at approximately 50 per cent of their face
value. The Brazilian government retains a ‘golden share’ of Embraer that give it a seat on
the board and veto rights over a change in control of the company and significant policy
decisions. (Ghemawat et al. 2000: 3) This presence is justified in terms of a veto power for
decisions that may affect ‘national security’ (Oliveira 2005), but no effective interference in
day-to-day operations is evident.
Stage 4: The Turnaround
As a privatized company, Embraer now enjoys state support similar to its competitors, such
as Bombardier in Canada, with export financing subsidies and other indirect support.
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Mauricio Botelho was brought in as the CEO of the newly privatized company. Botelho
revamped the entire management team, reduced the number of managerial levels, and
instilled a new focus on ‘market-orientation’ rather than production and development.
Botelho, with a strong finance background, proceeded to major workforce reductions and
salary cuts. He also increased outsourcing and refinanced at lower interest rates. As a result,
operating losses were cut, but the company was still only at the break-even point due to the
heavy debt burden. (Ghemawat et al. 2000: 5)
The company invested its future in the ERJ-145, a regional jet that updated the Brasilia
design, utilizing technology learned from the CBA 123 and the AMX military plane
(Oliveira 2005: 80). The ERJ-145 is a 50-seat regional jet that had been in development off
and on since 1989. The BNDES provided $115 million in financing and another $100 million
came from other external investors. The plane was certified by the FAA in December 1996.
The main competitor is the CRJ-200, sold by Bombardier of Canada, which had been certified in January 1993. The ERJ-145 apparently has more spacious seating as well as better
operating costs, due principally to lower weight. The price is also more competitive – $18.5
million per plane as opposed to $21 million for a CRJ 200 (Oliveira 2005: 36). Large orders
from Continental Express and American Eagle ensured the success of the plane, and led to
the development of derivative jets, the ERJ 135 and the ERJ 140, both slightly smaller
(Ghemawat et al. 2000: 6). Government export financing was ‘decisive’ in gaining these
contracts over Bombardier, and these deals ensured the financial turnaround of the company (Cassiolato et al. 2002). The regional jet competition was fierce; both Dutch manufacturer Fokker (founded in 1912) and Swedish Saab (founded in 1947) failed in 1996 and 1997,
respectively.
Stage 5: A Global Competitor
In its current stage, Embraer has developed its early need for private and foreign partners
into an integral part of its strategy, setting the mark for global integration of supply chains
in aerospace, which even Boeing has now followed. Embraer has begun to graduate from
regional to long-distance jet competition, taking on Boeing and Airbus in the 100-seat range
with the 170 and 190 models. It also began eyeing military crossovers with a military version
of the latter, tentatively the C-390. Finally, it has reinvigorated its entry into executive jets
with the development of the six-seater Phenom 300.
Brazil’s two largest pension funds, Brazilian financial conglomerate Companhia
Bozano, Simonsen (CBS), and Wasserstein Perella, a US investment bank, acquired a 45 per
cent stake in Embraer in December 1994 for $89 million. Between 1995 and 1996, the new
investors, with help from public agencies coordinated by BNDES (including the Banco do
Brasil, the Ministries of Finance and Industry, Commerce, and Tourism, and the Special
Agency of Industrial Finance, Finame/Finamex) injected $500 million in fresh capital into
the company to help develop the ERJ-145 (Bernardes 2000). French aerospace and defence
companies also acquired a 20 per cent stake in October 1999. The new alliance was seen as a
way to improve capabilities in the defense market, including expansion beyond aircraft
(Ghemawat et al. 2000: 3, 14–15). Embraer’s multinationalization began in 2002 with the
creation of a joint venture with China to produce planes for that most promising market.
Embraer owns 51 per cent of the shares of the newly formed Harbin Embraer Aircraft
Industry Company Limited (HEAI). Embraer made the strategic decision as China took a
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page from Embraer’s book by threatening import tariffs of 23 per cent and beginning its
own competitive production (Gonzales 2005). This necessary step is also fraught with
danger as Chinese, Russian and Japanese plans to enter new aircraft into the regional jets
market seem in sight.
The downside of the globalization of supply strategy is that the levels of value-added
and local manufacturing have remained quite low, thus there is still a high level of external
dependence on technology and finance (Dagnino 1993; Oliveira 2005) With a stake in
Embraer’s success, these European and American companies provide a ready constituency
for ensuring market access for Embraer’s aircraft. More importantly, it allows Embraer to
specialize in the design, integration, marketing, and the manufacture of certain components,
reducing research and development costs and allowing for the ability to continually learn
from long-term relationships with technological leaders in particular areas. According to
several authors (Figueiredo et al. 2005; Oliveira 2005; Oliveira & Bernardes 2002), there are
three levels of the Embraer–foreign partner network. The first level consists of partnerships
with multinationals to co-design and help finance a project. The second is of suppliers of
systems, parts, and services for the planes; 98 per cent of these are foreign. Some membefs of
this group have stakes through revenue-sharing and some are paid directly. These partners
are expected to make significant investments in research and development for the project,
thus sharing the risk and responsibility. The third group includes outsourced suppliers, who
provide labor in terms of engineering, machining, and chemical treatment; they receive raw
material and design from Embraer. Partners invested $550 million or 40 per cent of the total
$1.4 billion cost for the development of the ERJ-170/90. Embraer’s strategy has changed
over time; approximately 200 suppliers worked on the 145, while only around 30 are
involved with the 170/90. Only 10 per cent of the suppliers are Brazilian 3):(Figueiredo et al.
2005), sparking concerted efforts by both the São Paulo industrial federation (FIESP), the
national small and medium enterprise support programmeme (SEBRAE) and local business
associations to increase local sub-contracting (Goldstein 2005). However, as authors have
pointed out in regard to the aerospace industry, there is no ready logic in current global
aerospace supply chains that promotes local linkages (Esposito 2004; Niosi & Zhegu 2005).
Embraer’s learning curve as a global integrator is summarized in Tables 1 and 2.
TABLE 1
Evolution of partnerships in the production of new models
EMB 120
ERJ 145
170
Embraer is sole manufacturer
Vertically-integrated production
chain
Non-automated planning
Partial risk sharing
Subcontracting of some
processes
Computer-based planning
Intensive risk sharing
Extensive subcontracting
Assembly-line manufacturing
Assembly line manufacturing
Traditional manufacturing system
Lean production
Source: Oliveira (2005)
Computer-based mock up
and simulation of processes
Manufactured in docks and
then assembled
Lean production
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TABLE 2
Embraer’s strategy for the acquisition and development of technology
Phase/description
Production
Production design
Includes cutting and fabrication of sensitive
materials, assembly of metal pieces and parts.
Organized by the Department of Product
Engineering.
Selection of materials
The production of planes is sensitive to
physical considerations, such as resistance
and durability of the material, and skilled
labor must be developed to handle the
equipment and the material.
Embraer’s technological strategy
One observes a developing of capacity through
previous contracts with Aeromachi, Northtrop and
Piper. The learning process allowed for the
development of internal expertise related to the
coordination of risk sharing partnerships. Aspects
related to quality control, critical technology and
the organization of production were absorbed. The
effort to internalize the learning of these processes
and skills development is consolidated through the
PEE (Programme of Specialization in Engineering).
It is possible to historically verify that the use of
offset contracts was important, principally in the
development of the military segment. Here one can
highlight the contracts with Piper and Northrop.
Today, in the production of commuters, there is a
risk and development sharing partnership with
other companies.
Assembly
The partnership with Aeromachi was important for
organizational learning about assembly. Today
Embraer has expertise in the integration and
assembly of parts, with the current
model approaching the modular production
characteristic of the automotive industry.
Source: Oliveira (2005).
Comparing Embraer’s success with Argentine FMA’s failure
Stage 1: An Early Start
Despite a surprising lack of documentation and resources regarding the Argentine aircraft
industry, through field research we can piece together some essential facts to complete the
comparison. The Argentine aerospace industry began to produce planes in 1927 in Cordoba
in the SOE Fábrica Militar de Aviones (FMA), on the basis of German designs. The plan
was that the factory would serve as an industrial pole for the development of the country, as
part of the general context of import substituting industrialization.
As Pérez Esquivel observes, the management of industries by the state was inherently
problematic, since:
public enterprises constituted tools for polyvalent and complementary goals: to promote
industrialization, to regulate the market, to distribute income, and to stabilize the economy.
The protection of national autonomy preceded the gravitation towards external capital, the
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material base for geopolitical considerations of national integration, and the support of
national defense policies [my translation].
Moreover, there was no real strategy to coordinate state enterprises, which had a tendency
towards constant expansion and negotiated separately with the Treasury. The military’s
constant interference created a conflict between the enterprises’ own objectives and means
and the demands of the Armed Forces (Perez Esquivel 2005: 2, 10–11). The Argentine
government’s early interest led to Argentine civilians and military officials training abroad
in the industry. Initially planes were assembled under license from foreign producers. Lalouf
reports that employment at the factory in 1930 was around 80 people. From the start,
however, there was a great deal of turbulence in both economic and institutional terms.
Heated technical arguments began within the military’s Aeronautical Service regarding
whether to continue to assemble planes or license or begin to design their own (Lalouf 2005:
62–63). Sadly, this argument was never really resolved until the privatization of the company as discussed below. The argument came to a head at various times throughout the life
of the FMA. In 1935, a Congressional initiative sought to kill the project entirely, placing in
doubt the technical capacity of its directors and their activities (Halbritter 2004: 258–259).
Paralleling the later Brazilian case, a more organized effort at domestic production
came in 1943 with the founding of the Instituto Aerotécnico and the conversion of the
Aeronautical Service into the Argentine Air Force (FAA) under a new revolutionary
government, including Labour minister Juan Perón. The government created the National
Doctrine, giving the state a dirigiste role in the economy, including industrialization and
atomic research. These efforts were in line with the economic isolation of the Second World
War, which gave national production advocates the upper hand, albeit temporarily. Since
Argentina declared neutrality in the war, it was cut off from arms sales by the US (and later,
from post-war aid). This motivated it to begin local sourcing of parts and production in a
variety of sectors, including providing for its own aviation. Argentina recruited Emile
Dewoitine, a French aeronautical engineer, who had left following the fall of France, to
begin designing and building military planes for the Air Force. This led to the Pulqui I jet
fighter in 1947, which was at the forefront of worldwide technological developments and
production in aviation, though it could carry only limited amounts of arms due to very tight
space restrictions given the size of the fuselage (Lalouf 2005: 75, 94). In 1947, the Argentine
journal Aeronave stated that Argentina was building a jet fighter with the help of European
specialists and that the technical capacity built up from the project would place Argentina in
the
immediate future not far from similar institutions among the three primary air powers of the
world (as cited in Lalouf 2005: 1).
A second wave of recruitment of German engineers centred on the recruitment of Kurt
Tank, chief designer of the Focke-Wulf aircraft company, who was smuggled out of Europe
by Argentine agents and recruited his own team from other fleeing Germans with the
support of Perón. Tank suggested developing a number of projects, including new planes as
fighters, trainers, bombers, and reconnaissance. He also suggested the development of an
aluminum plant to feed the aircraft industry. Finally, he proposed the development of a
commercial plane for 30 passengers (called the Condor II, after the plane he designed in
Germany). The main result was the development of the Pulqui II, the next generation of
the fighter plane for which the prototype was competed in 1951. Fatal accidents with the
prototypes led to revisions of the project; moreover, limits in terms of armament capacity
340
A. HIRA and L. G. DE OLIVEIRA
and speed as compared with contemporaries continued to fuel critics of the national plane.
Internal dissension was also rife in that Argentine engineers felt displaced by the German
transplants and they backed alternative designs (Lalouf 2005: 114–116, 155–160).
Stage 2: Institutional Chaos and Tailspin
Despite an early and promising start in developing native capacity (almost the same time as
developed nations), Argentina would squander it through a combination of government
mismanagement and an unwillingness to accept the learning curve inferiority of native
models. Last but not least, the lack of interest to move towards financial viability through
commercialization would perpetuate the industry’s status as a pawn of shifting political
interests.
In 1952, the name of the FMA changed to Industrias Aeronáuticas y Mécanicas del
Estado (IAME), based in Córdoba. The new government, including Perón himself, began to
change priorities, seeing automobile production as more important than aviation and
re-directing resources away from the latter sector. Perón believed that Argentina would one
day produce a million autos (Halbritter 2004: 261). The Córdoba plant began diversifying
industrial production to a wide variety of products, including automobiles, tractors, motors,
motorcycles, and arms. This may have been the first major blunder in terms of industrial
policy, in reducing resources further at a time when major technical advances were occurring in international aviation, including the transition from piston motors to turboprop
engines, needed to create jets and the development of integrated circuits of innovation,
which led to the ability to surpass previous limits on aviation performance. A former
engineer at the plant states in an anonymous interview with the author:
As military men, we thought we could do anything with the appropriate will. We did not
think of the complexity of the task as we would for something like surgery.
Ironically, the auto sector itself was soon taken over by the Kaiser company of the US and
Fiat of Italy.
Even more damaging was the political institutional volatility, a pattern that was to
doom the possibilities for a consistent long-term strategy for the Fábrica, which remained a
captive of the Air Force rather than becoming the industrial pole as desired. As Pérez
Esquivel relates:
The alternation of civil and military regimes, promoted by coup-oriented coalitions that
pushed their interests through military intervention in the political arena strengthened the
growing autonomy of the Air Force. The military intervention and the growing institutional
autonomy produced successive changes of roles and institutional objectives, following the
predominating doctrines (at the time)…. Each new force tended to strengthen itself independently of the others, creating numerous super-positions in arms production initiatives, the
expansion of activities and resources, and as such making the tasks of cooperation difficult
(Perez Esquivel 2005: 10, translation my own).
A new government in 1955 shook up the regime as the country became increasingly
polarized around pro- and anti-Peronista factions. Meanwhile a growing macroeconomic
crisis contributed instability in that dimension.
The demise of Perón’s government had incalculable repercussions for the future of
the country. The new government shook up all institutions, changing key personnel in the
IAME, the Air Force and the Instituto Aerotécnico. Lalouf reports that between 1955 and
1960 there were 9 different directors, with a maximum term of 23 months, and equally
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341
volatile policies. The IAME was transformed into the Dirección Nacional de Fabricaciones
e Investigaciones Aeronáuticas (DINFIA). They also fatefully pushed Kurt Tank out of
the country, noting his ‘irregular’ entry. The moment gave the opportunity for critics of
national production a chance to voice their doubts within the Air Force, citing the quality
and reliability problems of the Pulqui II experience. This led to the renewal of assembly of
planes under license, and a proliferation of additional projects. The alternative of finding a
domestic private partner was discussed in theory but could not be materialized. Along with
this came enticing offers from the US to purchase military planes at low cost, accepted by
the new government seeking a re-alignment with the US during the Cold War, as it began to
face a leftist guerrilla insurgency at home. Even with the transition to civilian government
under Frondizi, pressures from these critics remained strong within the military. In 1960,
the fifth prototype of the Pulqui II was realized, the same year that 14 F-86 Sabres were
delivered from the US following a year of training Argentine pilots (Lalouf 2005: 164–174,
190–196).
The loss of technological capacity was recognized by the late 1960s. Lalouf notes that
by 1960, the Pulqui II had only half the speed of contemporaries, could not be fueled in the
air, could not carry missiles and had limited radar capacity (Lalouf 2005: 206) Changes in
the name of the enterprise reflect the ongoing volatility in management, resources, and
support. The DINFIA became the FMA again in 1967, but in 1968, it adopted the name
Area Material Córdoba. In 1972, the Air Force pushed the Fábrica to solicit offers to
assemble helicopters under license from foreign companies, but the contract was annulled
in 1973 after being deemed economically unviable (Halbritter 2004: 262–263). In the 1970s
the Pucará fighter and the Pampa trainer planes were designed.
Stage 3: End of the Day
Though at one point (1947) Argentina was the fifth largest manufacturer of planes in the
world, a series of disastrous decisions in the 1980s, including the failure of such partnerships,
helped to finally doom the enterprise, including:
•
•
•
•
The Argentine state contracted the US company LTV to provide engines, seats and
emergency systems for the IA-63 Pampa plane. LTV went bankrupt and the result was
a loss of $400 million to the Argentine state.
The New Zealand and Australian Air Forces agreed to buy the IAE-63 Pampa plane but
due to a lack of credit availability, opted instead for an Italian plane.
The 1982 “Condor II” project to build a rocket was dismantled by the Menem
government under pressure from the IMF for lack of financial resources.
The aforementioned joint CBA-123 project with Brazil, created in 1987 to produce a 19
passenger plane with speed greater than 600km/h was estimated to cost $300 million, of
which Embraer would pay $200 million and Argentina’s Fábrica Argentina de Material
Aeronáutico (FMA became FAMA to begin producing for commercial purpose in 1987)
$100 million. Each plane would cost $ 4.5 million and 127 formal requests to examine the
plane followed an air show in France. When in 1989 the FAMA was unable to deliver
materials in time and according to specification, Brazil reduced Argentine participation
to 20 per cent. When Argentina again was not able to produce adequate volumes or
finance expansion, Brazil turned to foreign banks for financing. As noted above, the
failure of this plane probably deterred Brazil from any further joint efforts (Benitez,
internet source).
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A. HIRA and L. G. DE OLIVEIRA
The long-standing problems of the Fábrica were apparent and as early as 1977, alternatives were openly discussed. In ‘La gran esperanza’ (the great hope), Peluzzi, writing for
an Air Force journal, makes several key suggestions to his compatriots for finding a way
forward. First, he says that Argentina must look to the possibilities for private domestic/
international cooperation, without ignoring national priorities. Second, he says while FMA
must keep up with knowledge, and the FAA has the right to demand contemporary technology, this can not come ‘at any cost’. Third, the FMA should look for markets outside the
country to reach economies of scale. Fourth, adequate consideration of the business cycles
of the industry must take place. Last, Peluzzi states that the FMA needs to consider
integrating components globally, as very few products can have 100 per cent local sourcing
(Peluzzi 1977).
Unfortunately, Peluzzi’s and similar suggestions, which could be read almost as a
playbook for Embraer’s success, were never seriously considered. The defeat of the military
in the Malvinas War in 1982 led to a strong anti-military attitude and set of policies in the
country. In addition to ongoing economic crisis, the new democratic governments tried to
distance themselves from the military projects of the past regime. Alfonsin’s government,
for instance, vetoed the sale of the Pucará to the Dominican Republic in 1983. In 1986,
similar sales to Iraq and Mauritania were vetoed by Alfonsin, who sought to promote
Argentina’s image as a peacemaker. The Pampa was seriously considered for adoption
by the US, in 1994, but in good part owing to its association with LTV, it lost the bid
(Halbritter 2004: 410–416). In 1987, the government, upon creating FAMA, tried to create
a coalition of partners to take over the enterprise. A coalition of Italian companies Aeritalia,
Agusta and Argentine firm Techint had serious conversations about developing a
commercial plane based on the CBA 123, but the proposal ultimately went nowhere with the
government, as most of the construction would have been moved to Italy.
In 1995, under the duress of financial crisis and with the new ideas of neoliberal growth,
the Argentine government privatized the former Area Material Córdoba (AMC) company,
including the Fábrica Militar de Aviones, selling assets to Lockheed Martin, and ending
national production which had produced over 1,300 aircraft of 30 different types. The
privatization was one of many initiated by the Menem Government, in this case by Decree
899 in 1991, as part of a larger effort to reduce fiscal expenditures. A consulting report
at that time by ING bank suggested that half the work force of the AMC was surplus to
requirement, and that 24 million pesos of new investment were needed, while it estimated
that the Air Force had only 7 million at its disposal (Perez Esquivel 2005: 122–123). The
terms of the privatization of the facility to Lockheed are for 25 years with two additional
ten-year options; however, Argentina has an opt-out clause every 5 years. Though the latest
version is secret, terms have been released for the previous (second) contract. Lockheed
is supposed to maintain planes for the Air Force; develop support programmemes for the
development and construction of new types of planes, specifically the Pampa, motors and
components, for sale domestically and internationally; and employ at least 2200 of the personnel of the plant. Lockheed received $230 million for these services. Lockheed’s purchase
of the FMA coincided with the receipt of a five year contract from the Argentine Ministry of
Defense for the maintenance, modification and modernization of the Air Force fleet in 1995,
in particular refurbishing 36 used Skyhawk A-4 planes purchased from the US in 1993
(Scheetz 2002). The Skyhawk purchase was roundly criticized both in terms of costs and
level of technology available via other options. This contract was worth $279.5 million to
Lockheed.
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The privatization, like many others in Argentina, sparked off a firestorm of protest that
assets were being given away at ‘fire sale’ prices. There was no solicitation of contract, and
no public discussion of what would be reasonable terms. The controversy was not helped
when Lockheed reduced the number of employees from 2,950 to 1,950 and then to 950. Still,
this travesty did not prevent a renewal, signed in July 2000, which included maintenance of
the existing fleet and the manufacture of 12 AT-63 attack-trainer aircraft. According to
Sheetz, a 2001 contract promises to increase the workforce back to 1100, in order to produce
at least 12 Pampa planes under contract for the Argentine Air Force. Unfortunately, with
the previous lay-offs much of the skilled workforce has either gone ‘into retirement or
emigrated to Embraer’ (Scheetz 2002). Moreover, the Lockheed privatization was necessitated not only by the fiscal crisis, but the lack of allocated budgetary resources for the maintenance of the newly acquired A-4 planes, a decision in which the Argentina Air Force ‘took
no part’ (Scheetz 1998: 110). Another renewal took place in 2005, this time with a secret
contract. In July 2006 new protests by Lockheed workers were taking place amidst
rumblings of the Argentine state possibly annulling the contract.
Conclusions: Lessons for Other Developing Countries
We can now answer the two questions of the study. First, that state support of high-tech
firms is crucial to their success throughout their lifespan. Former CEO Ozires Silva states
that the Brazilian Government has been ‘fundamental and allowed the company to exist’
(Silva 2005: 426). Silva, who later went on to manage the highly successful Petrobras state
oil company, was known for being oriented towards ‘privatist’ management of state
enterprises (Franko-Jones 1992: 70). Current CEO Mauricio Botelho has stated:
Reliance on Brazilian governmental support is critical. They are the ones that count. The US
won’t support us, even though it is our biggest market and our biggest source of imports. We
want to keep on being the technological and industrial arm of the Brazilian government
(quoted in Ghemawat et al. 2000: 15).
However, we have seen that the state can have both positive and negative effects. This brings
us to our second question, namely how state–firm relationships can optimally evolve. Our
analysis suggests the following.
Stable and consistent but flexible state support for industry growth is necessary
Brazilian state support for Embraer was at arm’s length, but stable and consistent, including
serving as the most important customer. By contrast, the Argentine government, whose
initial strong support meant a viable industry in the early years, began to vacillate around
the same time Embraer was forming. Argentines purchased from abroad, and were
factionalized in their support.
Brazilian state–firm relationships were also more flexible with changing global conditions and the evolution of the company. Embraer stumbled upon the solution to this
problem in developing its global systems integration approach.
Both parties should expect and absorb failures along the way and possess a willingness to
finance
Embraer has had a number of major project failures along the way, including the CBA 123
joint venture project with Argentina. Embraer has also suffered through major downturns
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A. HIRA and L. G. DE OLIVEIRA
in the market. Yet, in hindsight, each major crisis appears to have been another opportunity
for improvement. Brazil stuck with its long-term plans, and continued to try to improve on
the basis of failure. In Argentina, as a property of the Air Force, the FMA never really had
a chance in the initial period to become efficient. As one interviewee described, ‘The goal
was to produce planes [efficacy]. Efficiency was a secondary consideration.’ It was quite
striking to the author that there is no documentation regarding audits or financial reports
to be found regarding the Fábrica; no systematic evaluation appears to have taken place.
Indeed, the Fábrica, created initially by secret decree, never had jurisdictional standing.
An autonomous centralized training and research facility with a clear mission is essential
In Embraer’s case, the ITA was set up as a separate entity whose sole purpose was to
develop the aircraft industry. The politicization of the Latin American economy reinforces
the importance of this move in more general terms (Maldifassi 1994: 116–117). Since it was
linked to military budgets, it had a particularly motivated workforce and budget. The result
was the foundation of aerospace engineering training, geared towards a concrete mission
of creating a competitive aircraft industry (Botelho 1999). Moreover, almost from the
beginning Embraer embraced the idea of producing civil as well as military aircraft. By
contrast, the FMA was conceived of purely as a means to service the Argentine Air Force’s
needs, yet even parts of the Air Force preferred to purchase planes outside the country. In
Argentina, the lack of vision on civil – military crossovers and the need for long-term
support dampened the advantages of an early start. Multiple projects and spin-offs, including whole other industries meant that inadequate resources were available for maintaining
technological capability on international levels. Heavy reliance on outside designs (and
foreign teams) reduced national autonomous capacity and the reputation of the aircraft.
The privatization effectively gutted the human capital built up over the 63 years of
experience, ironically to Embraer’s benefit, where key Argentine experts joined.
Export or die, and recognize that underserved market niches are opportunities for learning
As noted above, Embraer’s orientation towards exports in the 1970s was crucial for its longterm success and particularly achieving economies of scale in production and world-class
technology. Embraer’s need to export forced the state to provide increasing amounts of
public finance and to gear public support towards exports, including Pro-Ex subsidies and
marketing assistance. The export markets themselves disciplined the cost structure and
generally guided the enterprise towards that central mission. As related in the CBA 123
debacle, the cost structure and design of the planes had to be guided towards external
markets, forcing a continual learning curve approach in the company. It also forced the
company to develop an international marketing ‘savvy’ that led to relationships in the key
markets and the licensing breakthroughs. Last but not least, the need to reach external
markets has helped Embraer to adopt the global modular design of production, by which it
manufactures with international partners. None of these aspects ever occurred in
Argentina’s FMA, essentially because of the lack of mission.
Embraer understood that it would not likely be able to compete with Boeing and
Airbus in large passenger planes. It astutely focused on underserved and less competitive
niches that were more feasible as part of its learning process, beginning with agricultural
spray planes to military training planes, at each point having a focal project, beginning with
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the Bandeirante. These forays allowed it to work out the ‘kinks’ in the technology, save
financial resources, and slowly build a reputation for quality and competence in small
aircraft. Only after this learning curve did it enter into the moderately competitive mid-size
aircraft segment.
Certainly, we have to consider that timing played a role in the fact that Argentina’s
objective in the heyday of its production was national self-sufficiency in the industry, in line
with the prevailing ideas at the time. To be sure, Embraer was fortunate in that its designs
for the Bandeirante and Brasilia planes meshed with the development of the new regional
commuter market rising in the 1980s as a result of US deregulation. These market windows
require pro-active strategies, such as Japan’s auto manufacturers being ready to take off by
producing fuel-efficient vehicles in the wake of the 1970s oil crisis. Given Argentina’s industrial base, it could have equally entered such a market had institutional and financial factors
been better managed.
By contrast with the consistent public support and internal management that enabled
long-term success, the Argentine government has effectively subsidized Lockheed without
ensuring the survival of its industry or human capital. With no consistent strategy on indigenous design or foreign partnerships, and inconsistent support for either, with deals killed,
and with no marketing or export strategy, it is difficult to see how Argentina could have
turned the situation around by the 1990s, in the midst of a macroeconomic crisis (not
dissimilar to Brazil’s, however). Yet, even in the period leading up to the privatization, it is
conceivable that some aspect of the Fábrica could have been preserved through the engagement of national and foreign capital, certainly there were several possibilities, particularly
in the Pampa trainer. As Pérez Esquivel notes, from the outset, the FMA project was ‘never
closed to collaboration with private capital, either national or foreign’ (Perez Esquivel 2005:
8). The contract with Lockheed Martin, without any solicitation of bids or government
scrutiny, therefore remains inexplicable. The renewal of the contract is even more unfathomable given that the initial promises to maintain jobs and to sell Argentine planes have been
openly broken, with immense social costs. It is a big leap to move down from aircraft manufacture to a maintenance hub, and even the latter has not succeeded as a strategy. The foundations of the industry built up through precarious straits over the course of 80 years, have
been wiped clean.
Acknowledgements
We gratefully acknowledge the support of the Canadian Social Sciences and Humanities
Research Council and Simon Fraser University for this research. We particularly would like
to thank Thomas Scheetz for his generous guidance in the Argentine portion of the research.
We would like to thank Ron Hira, Tom Scheetz, David Pritchard and Brian Wixted for
comments. Anil Hira translated all materials for citation here. This article is dedicated
by Anil to his brother, Ron, for inspiring him to examine the question of technology and
development more.
In addition to secondary and sector-specific sources, this research, particularly in terms
of understanding the context of the issues from the point of view of complex state–firm
relations, could not have been completed without the generous support of numerous colleagues in Brazil and Argentina, academic, military and corporate, who shared their life
experiences with the states and markets in open-ended interviews and creating access to
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A. HIRA and L. G. DE OLIVEIRA
privileged archival material; we mention the most important here where possible (several
sources did not want to be identified for obvious reasons). We have rendered anonymous
quotes and data from sources interviewed in order to protect them. All interviews were
conducted by Anil Hira in Brasilia, São Paulo, and Rio de Janeiro and Buenos Aires
between May–June 2006. I include a short description of interviewees background/expertise. I also acknowledge gratefully the engagement of the GUP18 users group of Argentines
interested in aerospace.
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