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Embraer conducts final assembly of its passenger jets in a large hangar in Sao Jose dos Campos. As many as six jets can be accommodated in one hangar. (Photo courtesy of Embraer)
Business Spotlight

Can Brazil's aerospace champion Embraer conquer Asia?

Regional jet maker eyes India, Vietnam and beyond. Competitors have other ideas

MITSURU OBE, Nikkei Asia chief business news correspondent | Latin America

SAO JOSE DOS CAMPOS, Brazil -- In the sprawling assembly plant of Brazilian jet maker Embraer, a little Japanese sign is pinned on a whiteboard. "Kaizen," it says, a Japanese word for continuous improvement.

"We do hundreds of kaizen projects every year to increase productivity in our production sites," said a factory manager, looking out to where a 146-seater E195-E2 is awaiting its wings, engines and a paint job. "Last year, we were able to achieve a 17% reduction [in production lead time] despite all the difficulty we had in the supply chain," he said. The company aims to achieve a 40% reduction by the end of 2023.

Kaizen was made famous in Japan by Toyota and others and the scrap of paper pinned up in the factory is emblematic of a Brazilian national champion increasingly open to ideas from outside. Francisco Gomes Neto, Embraer's newish CEO, has come from the auto industry. Embraer now has two U.S. citizens sitting on its board. The broadening of perspective is crucial: The battle for market share rages globally and, according to interviews with executives here, will increasingly be fought in Asia.

Embraer predicts its passenger jet production will increase to 60-70 aircraft this year, and eventually back to its prior level of 100-110, after two years dented by the pandemic. But achieving the goal may not be so simple. The company now faces competition from Airbus for larger jets and state-owned Commercial Aircraft Corp. of China (COMAC) for smaller ones -- while Japan's Mitsubishi Heavy Industries, which acquired the regional jet business of Canada's Bombardier in 2020, is pushing its customers to use their existing fleets for as long as possible instead of buying from Embraer.

"The market is very competitive," acknowledged Gomes Neto in an interview. He says Embraer is pursuing both cost-cutting and an expansion into new markets for its commercial aviation division. "This segment is extremely important to us. Commercial aviation used to be, and will be, the biggest business in our organization. We believe we have a potential to double the size of the company in five years."

Under CEO Francisco Gomes Neto, Embraer has embraced the Japanese business concept of kaizen, constant improvement. (Source photos by Mitsuru Obe) 

Small passenger jets are a niche, distinct from the market for large jets that has long been dominated by Boeing and Airbus. So-called regional jets, with 100 or fewer seats, are a niche within a niche, used by airlines to connect smaller cities with the large hub airports. It's a small but stable business that existing players, such as Embraer and the old Bombardier, now called MHI RJ under Mitsubishi Heavy Industries, are trying to keep against new entrants like COMAC. Staying lean is key.

"Pre-COVID, Embraer used to produce 100-110 commercial aircraft per year and they used to lose money," said Victor Mizusaki, analyst at Bradesco BBI, a Brazilian investment bank. "Now we talk about 45-50 aircraft per year and they are making money. They are much more efficient in terms of cost."

Under Gomes Neto, CEO since 2019, Embraer reduced its workforce by almost 3,000 to 18,320. It sold off factories in Portugal. In the U.S., it consolidated executive jet production in Florida and restructured maintenance and support operations in Connecticut. "We want to be attractive for investors," Gomes Neto said. "We want to grow and to be very profitable.

Gomes Neto also represents a growing diversity of management. In the past, Embraer executives were mostly from elite engineering school ITA, also located here, said Mizusaki. Today, non-engineers in the C-Suite include Chief Financial Officer Antonio Carlos Garcia, a former ThyssenKrupp executive. Board members are no longer just Brazilians with little global expertise in the aerospace industry, Mizusaki said. It has two Americans, from Boeing and GE Aviation, with an eye on markets such as Asia.

"Diversification is fundamental," said Gomes Neto. It "brings different knowledge and different relationships to the company. More than 80% of revenues we make are outside of Brazil."

Asia figures prominently in Embraer's push for new markets. It plans to develop a turboprop commuter aircraft in late 2020s for short-haul routes that it expects to be popular in the region. A turboprop can take off and land on shorter runways and is more fuel-efficient on short distances than jets. 

In India, Embraer is in talks to sell regional jets to low cost carrier IndiGo. IndiGo's appointment of Pieter Elbers as CEO in May has prompted speculation that the Indian airline will become more open to using Embraer jets. Elbers was the former CEO of Dutch national carrier KLM, a big customer of Embraer.

"Of course I know Pieter very well. Of course we have good relationships with Pieter because he was our customer," said Arjan Meijer, Embraer's commercial aviation chief, during a recent media event. "But we will have to talk to IndiGo, not just to Pieter, for their fleet development." 

Another Indian airline, Star Air, has been a user of Embraer's 50-seater ERJ-145 and is seen in need of an upgrade. "We are in contact with potential customers in India. We have our aircraft operating in India already," said Gomes Neto. "India can be an important market for our turboprop as well as for the E2," he added, referring to the flagship family of passenger jets that can carry between 100 and 146 people.

In April, Embraer conducted a demonstration of its E190-E2 aircraft for Vietnam's airlines, including Bamboo Airways, an up-and-running low cost carrier offering access to resorts and sightseeing spots within the long and narrow country. Bamboo currently has five Embraer aircraft of the previous generation.

Embraer, however, has had more difficulty expanding in China, where the government in Beijing wants to nurture a domestic aerospace industry as part of its "Made in China 2025" industrial policy, and is seen pushing Chinese airlines to buy from COMAC, not from foreign suppliers.

COMAC is expanding its family of aircraft. Already in operation are the ARJ21 regional jet with up to 90 seats and the larger C919 narrow-body jet seating up to 168. The C929 widebody jet for 280 passengers is under development. China aims to reduce its dependence on Airbus and Boeing for commercial aircraft supply by having its own aircraft maker. The country could even develop a network of sales and services facilities around the world in an export push. But without certification from Europe or the U.S., COMAC's aircraft can only be used in China for now. 

Embraer used to produce 50-seater ERJ-145 in China from 2003 to 2016, but now faces challenges selling or producing jets there. 

"In China, we are still working to certify the E2," Gomes Neto said. Without certification, an aircraft cannot be flown in the country. 

COMAC's C919 narrow-body airliner on display during the 2021 China Aviation Industry Conference And Nanchang Air Show.   © Getty Images

Japan's Mitsubishi Heavy -- the new owner of Bombardier's regional jet program -- is focused on selling in North America, and skeptical about the opportunity in Asia, where larger narrow-body aircraft produced by Boeing and Airbus are more popular among airlines and leasing companies. In part, this is because they can carry more people between Asia's densely populated cities. They also have higher resale value. 

"Are regional aircraft, below 100 seats or below 70 or 80 seats, really going to be as popular in Asia as in the U.S.? Maybe. Maybe not," said Hiroaki Yamamoto, CEO of MHI RJ Aviation Group. Since acquiring the CRJ in the carve up of Bombardier, MHI RJ has ended production, focusing instead on providing support and services for the aircraft in service.

The U.S. has been the biggest market for regional jets. It has many large cities scattered across wide distances and lacks railway infrastructure. The U.S. market has also been supported by a scope clause between major airlines and their pilots unions, which limited the size of aircraft regional airlines can operate. "In the next three years, we don't believe there is going to be a meaningful change" to the scope clause, said Embraer's Meijer.

Embraer's E195-E2 jet being assembled in a hangar in Sao Jose dos Campos. (Photo by Mitsuru Obe) 

Mitsubishi is in no hurry to resume aircraft production, either of the old CRJ or its own SpaceJet, amid a highly uncertain business environment including the pandemic and the Russian invasion of Ukraine. "If the situation is like today, we really don't know what is going to happen. And the cyclicality of this business has already been proven. Naturally, [airlines] are a little shy" to make big investments, Yamamoto said. "The natural choice would be to stay with the existing product for as long as possible."

Mitsubishi's strategy is to retain and build on Bombardier's customer base and to pursue a partnership for the possible future launch of zero-emission aircraft, perhaps running on hydrogen.

"I don't give up anything," Yamamoto said about CRJ's current market share. "I will do anything just to remain in the game, and even gain market share, either by way of new products or improvement of the aircraft... or better maintenance services," he said.

Embraer is also developing zero-emission planes of its own, but it is its global ambition that marks it out. While COMAC is limited to China for now, and Mitsubishi focuses mainly on North America, it is looking to Asia and beyond. "We sell a lot of products in the U.S., commercial jets and executive jets," said Gomes Neto. "And we want to sell to China as well. Both are important aviation markets for Embraer."

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