Sale of C-390 Millennium Transport Aircraft to South Korea

Brazilian aerospace company Embraer announced last Monday, December 4, that it has won the South Korean military's tender for transport aircraft. According to the announcement, the South Korean Defense Procurement Program Administration has selected the C-390 Millennium freighter for the Large Transport Aircraft II program, becoming the first Asian customer for the aircraft. It has not yet been announced how many aircraft South Korea has ordered. With this sales contract, South Korea joins the ranks of Portugal, Hungary, the Netherlands, Austria and the Czech Republic, which have already selected the C-390.

The C-390 sale marks a new era in the relations between the two countries. Both countries are seeking to increase their competence in the aerospace industry and to have a say on a global scale. South Korea, which recently succeeded in selling FA-50 aircraft to Poland, is a country that focuses heavily on military aircraft production. Brazil, on the other hand, is known to have a say in the production of regional passenger aircraft and business jets. Reflecting its experience in regional passenger aircraft production to the production of military transport aircraft, Embraer has developed the C-390 Millennium cargo aircraft, proving that it is a competent aircraft manufacturer in this field as well. As a matter of fact, the sale of the C-390 to South Korea is shown as an indicator of this. I believe that Brazil, which is lagging behind in the production of fifth-generation aircraft and wants to learn to produce fighter jets with Saab JAS 39, may also cooperate with South Korea in the field of KF-21 in the near future.

I find it important to know a little bit about Embraer, the company that brought this success to Brazil, and to understand the foundation and business philosophy of Embraer, which is considered to be the father of the Brazilian aircraft manufacturing companies that support the Turkish aerospace industry, especially the Hürjet development process. For countries like Turkey that want to achieve at least as significant success in the aircraft industry as Brazil, I will touch upon the brief history and development of the Brazilian aircraft industry and Embraer, which is at the center of this industry, and its achievements in the aircraft production range it represents. 

How Embraer was founded?

Embraer - Empresa Brasileira de Aeronáutica S.A. - was founded by government decree of August 19, 1969. Embraer, an adaptation of Petrobras' state-owned enterprise (SOE) structure to aviation, pioneered Brazil's development efforts in the field of aviation. At the time of its establishment, Embraer was 51% owned by the federal government, while the remaining shares were held by private investors in a partnership model. With the growing economy in the 1960s, demand for domestic air transportation increased and the need for new passenger aircraft grew. This presented an opportunity for Embraer to enter the regional passenger aircraft production business.

During the establishment phase of Embraer, approximately 150 qualified engineers transferred to Embraer from ITA, which can be called the state's research and production center in the field of aviation, and experienced blue-collar workers from the automotive industry were transferred. In areas not yet developed domestically, foreign designers (such as Joseph Kovacs, who collaborated with Embraer for many years), foreign universities (MIT) and partnerships with foreign companies (Piper, Aermacchi, Northrop, etc.) were utilized.

The Brazilian Government ordered 80 Bandeirante aircraft to pave the way for Embraer. This order increased the company's production volume and accelerated its development. After this first sale in 1978, by 1983, some 500 aircraft had been sold (126 in the US market).

Entering the US Aircraft Market for Regional Passenger Aircraft

In the 1970s, about 60% of the world's regional airliners were sold in the American market (75% with Canada). According to the US Federal Aviation Administration (FAA) rules, 19-seat airplanes had to have one cabin crew and 20-seat airplanes had to have two cabin crew. By producing the CTA-designed Bandeirante under the name EMB-110 as an airplane with a 19-passenger capacity, Embraer not only fulfilled the requirements of this rule, but also made a rapid entry into the aircraft industry. These aircraft were fitted with more powerful engines, rounded windows and numerous aerodynamic improvements. The same aircraft was modified into the EMB-111 version, which was later developed as a maritime patrol aircraft. The Super Tucano aircraft, developed in the same period, contributed to Embraer's success in the international military aircraft market, both as a training and light attack aircraft. In a short period of time, Embraer has become the shining star of the Brazilian aircraft industry with successful projects such as regional passenger aircraft, business jets and fighter jet modernization projects. 

Embraer's Industrial Capabilities and Capacity

For Brazil, the industrial competence of its aircraft companies is directly related to the industrial competence of Embraer, the country's largest aircraft company. Embraer is the leading Brazilian company in the export of aerospace industrial products. Embraer is a successful company in the aircraft industry with a wide range of commercial passenger aircraft (ERJ 145 and E-Jet family), private business jets (Phenom series, Legacy series, Lineage series, Praetor series), military aircraft (C-390 Millennium, Super Tucano) and agrochemical aircraft, including design, development, production, sales and after-sales services.

Privatization of Embraer

As a state-owned enterprise (SOE), Embraer was exposed to the impact of the crisis in Brazil in the 1990s and global neoliberal policies. As a result, it was privatized in 1994 as an extension of the "smaller state is good" approach. The only restriction on privatization was the provision that a maximum of 40% of the company could be sold to foreigners.

A number of dynamics were behind the privatization decision. After the financial crisis in the country in the 1980s, Embraer's production and commercial activities started to be interrupted due to the lack of financial support from public banks. Embraer, which had been dependent on government orders and financial support until that period, was managed according to political decisions and directives. For example, Embraer's management had to accept to cooperate with Argentina's military aircraft manufacturer for political reasons, even though it foresaw that the result would be "losing". Embraer's aircraft exports fell by 80% compared to 1990 figures. Under these circumstances, the design and development of new aircraft was suspended. Along with the global downturn in the aircraft industry, the main reason for this major decline in the Brazilian aircraft industry was the financial collapse in the country. In 1994, Embraer realized sales of $177 million in total, and downsizing was inevitable. 

The Brazilian Government of the time took action to eliminate Embraer's dependence on the public sector. It was decided that selling the company to a consortium of local and foreign investors would be the most appropriate solution. The main factor that led the Brazilian government to take this course of action in the face of demonstrations against the privatization of a company like Embraer, which had become a symbol of economic nationalism, was the growing belief that the company could survive without state support if it was managed in accordance with global commercial and production dynamics.

Embraer After Privatization

After privatization, in mid-1995, Mauricio Botelho, a mechanical engineer and director of Companhia Bozano, Simonsen (CBS), one of the major shareholders of the company, took office as the new General Manager. Thus, Embraer gained an independent management structure. The company was freed from external pressures, including the government. The rule that half of the members of the Board of Directors must be elected from among private sector company executives was introduced. In Embraer's top management, a management organization called "triple alliance" was formed. In this organization, multinational companies, domestic private firms and state-owned enterprises are represented in certain proportions. The management led the creation of cooperation structures with foreign partners to acquire dynamic capabilities based on innovation and to establish a competitive structure. The government also gave up "direct control" of the company and supported the creation of a more autonomous management culture.

CEO Botelho implemented the following three-step plan for change:

Labor Adjustments: 

Eliminated high salaries based on seniority and introduced a job-oriented salary payment model. Some 400 indirect positions were eliminated and direct positions based on direct production were introduced. Up to 25% of the company's profits were reflected as performance incentive payments to employees in units that met their targets, and labor productivity was rapidly increased.

Customer Oriented Structuring: 

Embraer's production mechanism was designed to have a certain degree of autonomy from the defense bureaucracy and to have the capabilities to compete in foreign markets. Instead of a product-based structure, a functional structure that takes customer satisfaction into account was adopted. Problems were better seen in function areas where mistakes were made, and it was possible to hold those responsible to account. In a short period of time, the factory was rapidly improved according to feedback from customers and became a factory capable of production.

Getting rid of secondary jobs: 

Support functions outside the main functions of the company (transportation, training, security, catering, construction, etc.) were outsourced.

Aircraft Design Capability at Embraer

After privatization, the design and decision-making capabilities that constitute the value chain of aircraft production continued to be under the control of the company. Within the framework of the "Risk Sharing Foreign Partnership Strategy", Embraer has gained the opportunity to sign contracts based on risk partnership with foreign component manufacturers under more favorable terms and to integrate the high technology products of these companies into its aircraft. Priority was given to covering development costs with revenues from product sales, and R&D costs were reduced by 30%. Meanwhile, companies founded by experienced former Embraer employees, inspired by the privatization wind, became Embraer's domestic subcontractors. As a result, privatization developed the Brazilian aviation cluster and gave a boost to the aircraft sector.

With privatization, priority was given to the modification of the ERJ-145, the first regional jet airliner with a 50-passenger capacity, and to establishing a foothold in the foreign market. The results of this were realized in a short period of time, and the production of over 1,000 of these aircraft was a great success. This success has had a positive impact on the post-privatization processes, empowering the new management to take the factory to new horizons and achieve higher sales success. Having surpassed Bombardier in the regional passenger aircraft sector, Embraer took the world leadership in the regional passenger aircraft market with its ERJ 135-140-145 (≤50 seats) and ERJ (EMB)-170-175-190-195 (≤120 seats) series aircraft. In Figure 3.3, Embraer commercial airliners and business jets are presented with their passenger capacities. Likewise, Embraer entered the private business jet market in 2005, and quickly ranked third in the world. Meanwhile, Embraer has established advanced operation bases in countries such as the USA, Portugal, France, Singapore and China to "meet customer expectations". In this way, it has become a multinational company with production and commercial sales links around the world.

Embraer, a Publicly Traded Company

Embraer is a company whose shares are traded on the São Paulo and New York stock exchanges. Some of its shares are still owned by the state. Among them, BNDES holds 5.5% and the Banco do Brasil pension fund holds 12%. The government's continued power to influence Embraer through "golden shares" has caused US OEM aircraft companies to be skeptical about the future of their business relationship with Embraer, especially in the business jet sector.

The Marriage That Didn't Work Embraer-Boeing Partnership 

On July 5, 2018, Boeing and Embraer agreed to form a joint venture for commercial aircraft. As a result, Boeing will acquire an 80% stake in Embraer's commercial aircraft and services division and a 49% stake in the joint venture for the KC-390 military transport aircraft for $4.2 billion. However, left-wing politicians in Brazil have viewed the merger with skepticism. The partnership agreement was approved by the Embraer board of directors and the Brazilian Government, even though it was temporarily suspended at least twice by the judiciary.

However, due to the Covid pandemic, Boeing has decided to suspend such investments, possibly temporarily, in a shrinking aviation sector. Affected by this, the Embraer-Boeing partnership was dissolved by mutual consent of the parties. However, I believe that Boeing, which wants to follow in the footsteps of its biggest competitor Airbus, will sit down again with Embraer, the number one regional passenger aircraft manufacturer in the world, and will work with Embraer to develop a new narrow-body aircraft similar to the A-220, but smaller than the Boeing 737. 

Embraer, the Engine of the São José dos Campos Aviation Cluster

The Brazilian aerospace cluster is centered in São José dos Campos. In the Technology Park there, the domestic aircraft and aircraft parts production chain is kept together. Within the aviation cluster, there are around 100 companies engaged in aerospace production. The cluster aims to create synergies between these companies, improve aircraft production processes and enhance national and international competitiveness. 

The companies in the cluster (e.g. Cemic, Akros, Elebra, Eleb, ETA, Mectron, N€n-Eletrônica, Fibra Forte, Aeroserv, Qualitas, N&N, Tectlecom and Alltec) were mostly founded by former Embraer employees (mostly ITA graduates). Some 30 aircraft companies derived from Embraer have chosen to locate close to Embraer (in Sao Jose dos Campos or the Paraiba Valley). For example, GE/Celma (Petrópolis - RJ), Aeronaut and Aeroeletrônica (Porto Alegre - Rio Grande do Sul) and Rolls Royce (São Bernardo do Campo-SP) have production at their sites. Other key companies include Aeromot, a maintenance and repair (MRO) company, which provides maintenance services for regional passenger jets. Embraer's subcontractors include light aircraft manufacturer Neiva and landing gear manufacturer ELEB. In general, some of the companies in the domestic supply chain have high-tech capabilities such as product design, development and production. Others have only low-level capabilities (chemical processing, surface coating, etc.). 

Meanwhile, foreign aircraft companies operating in Brazil continue to include Northrop Grumman, Lockheed Martin, Raytheon, Vosper-Thornycroft, Signaal and Alenia.

Conclusion

Since 1903, when the first airplane flew, Brazil has been a country that attaches importance to aviation and has been striving to develop its aircraft industry. Embraer, which was founded in 1969 as a product of these efforts, has increased the depth of the technologies used in the aircraft it produces over time, and has reached a level that can compete in global markets instead of producing under license. A clear sign that Embraer has acquired global aircraft design, development and production skills is the approval of airworthiness certificates for Embraer-produced aircraft by Western aviation authorities. 

Embraer has almost 60% of the commercial jet market (130 seats or less). Embraer has reached a capacity to produce around 180 commercial jet aircraft per year. According to the International Civil Aviation Organization (ICAO), there are 1,548 aircraft manufacturers in the world. However, only a few of these companies have the capability to assemble (final assembly) aircraft. Among the companies capable of final assembly in the field of commercial aircraft, five companies are capable of large-scale aircraft production. These are Airbus (Europe), Boeing (USA), Bombardier (Canada), Embraer and Tupolev (Russia). China, which is now producing the C-919, has also succeeded in achieving this capability. 

The fact that Embraer, a developing country's aircraft manufacturer, has achieved a successful position in the international aircraft industry is a success story outside the traditional norms of the aircraft industry. Today, Embraer is an aircraft manufacturer on a global scale with its production capabilities, capacity and turnover. I believe that the recent sale of the C-390 Millennium to South Korea should not be seen as an accidental success, but rather as a success story of the Brazilian aircraft industry, which is more than 100 years old, and especially of Embraer, which is at the center of this industry.