July 4, 2024 • 57 mins
There aren't many advanced manufacturing success stories in Latin America. And globally, there aren't many companies that can build commercial planes at scale. Yet somehow, one of the world's leading jet makers is Brazilian. Embraer is the third largest maker of commercial planes worldwide after Boeing and Airbus. On this episode, we talk about how the company came to be, what its opportunities are, and what lessons in economic development we can learn from its rise. We speak with two guests for the show. First, is Richard Aboulafia, a managing director at AeroDynamic Advisory, to understand the company's role in the aviation ecosystem. Then we speak with Juan David Rojas, a writer on Latin America, to understand the political conditions in Brazilian history that allowed the company to emerge and thrive.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:19):
Hello and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Alloway and I'm Joe Wisenthal. Joe, this is it.
This is your long awaited embre Aer episode.
Speaker 3 (00:29):
We're finally doing it. There are certain episodes we talked
forever about doing that we never do. The Jones, the
d Oh No. We did do a Dredgi Act episode,
the Jones Act being the big one. The other one
is we've never done it.
Speaker 4 (00:43):
You know.
Speaker 2 (00:43):
The Dredge Act episode was like a shadow Jones Act episode.
Speaker 3 (00:46):
True because price We've never done an Onion Futures episode.
But at long last we are going to be talking
about Embraer.
Speaker 2 (00:54):
Yeah, and this is such an interesting company. I know
we brought it up a few times before. But the
thing about it is, when you think about aerospace and
the layout of that particular industry, you usually think Boeing
versus Airbus. And we've certainly talked recently about the competition
between those two companies. They are the two biggest airplane
(01:15):
manufacturers aerospace manufacturers. But there's a third one, Comac. Not
quite yet, there's a third one, and it is a
lot smaller than Boeing and Airbus, but the fact that
it exists at all is kind of phenomenal. I don't
think a lot of people would have expected that the
world's third biggest aircraft manufacturer is in Brazil.
Speaker 3 (01:39):
That's exactly right, because for one thing, a you never
hear about them. B Generally speaking, there are not many
Latin American successfully global advanced manufacturing companies period. There are
other big Latin American companies obviously, but not in manufacturing.
Speaker 2 (01:57):
Most of them have to do with agriculture or commodity.
Speaker 3 (02:01):
Yes, yes, it's a very unlikely story, the fact that
this company exists at all. And it's not just that
they exist, because the first time that they came up
on the show, it was in the context of a
conversation about the troubles of Boeing. They're really good, they're
really respected in very well regarded, very well regarded, they
make high quality products, they're in demand from carriers all
(02:24):
over the world. And so it's not just that it exists.
It's not just as from Latam at least in its niche.
It's considered to be one of the best in the world.
Speaker 2 (02:33):
Absolutely, and so I think it's a worthwhile subject to explore.
How did Embrer come into being, what is its product offering,
what is the appeal? You know, it's a global market,
how has it managed to make inroads there, and what,
if anything it says about industrial policy and current efforts
(02:53):
to develop technologically advanced industries.
Speaker 3 (02:57):
This is the key thing, because we talk a lot
about industrial policy right now, in part because the United
States and also to some extent Europe, we're in the
midst of this sort of industrial policy fever, and there's
this enthusiasm for spending money, and there's this enthusiasm for
reindustrializing and building up at least some capacity in certain
(03:21):
critical things, whether it's electric vehicles, whether it's batteries, whether
it's solar panels, whatever it is. So I think it's
important to sort of have an understanding of prior waves
of industrial policy, because all governments from time to time
want to build their own champions or want to be
less reliant on some other country that they import from,
(03:42):
and so it's really good to sort of get an
understanding of some of the success stories and what actually happened.
Speaker 2 (03:48):
Absolutely all right, So this is a special episode, which
means we have two guests to talk about this. We're
going to start with someone who's been on the podcast before.
Richard Abulafia is of course the managing director over at
Aerodynamic Advisory, and we're going to start with him. Richard,
thank you so much for coming back on all thoughts.
Speaker 5 (04:06):
Oh, it's a real pleasure. Thanks for having me on.
Speaker 2 (04:09):
So when I think about the landscape of aerospace, I
mostly think about Boeing an airbus, but of course there
is a third and it happens to be Embreyer.
Speaker 5 (04:21):
Yes, that's right, much smaller but very, very impressive and
deeply influential company of Embreyer.
Speaker 3 (04:31):
So what is this company? What do they make? And
when you say impressive, what do you mean by that?
Speaker 5 (04:36):
Well, the fact that they were created and were able
to deliver aircraft that the market wanted and have been
through multiple different incarnations over the years, a respected provider
of aircraft to both airlines, business aviation customers and even
military customers. It's pretty remarkable when you think about it,
(04:58):
given the very high barrier entry in this business.
Speaker 2 (05:02):
So one thing I always hear when we start talking
about Embreer and how did it manage to become the
third biggest airplane producer in the world. A lot of
people will bring up this idea of specialization or having
some sort of niche in the market, some sort of focus,
And for Mbreer, it's the business jet, right like, that's
(05:22):
kind of what they're known for. A lot of people
consider them the gold standard in smaller business or regional jets.
How did that specialization come to be?
Speaker 5 (05:33):
Well, you know, the real breakthrough was in scheduled air transport,
first with turboprop regional aircraft, then with regional jet regional aircraft.
After a couple of decades of doing that, they realized
that the business aviation industry was actually quite right for
them to enter, and indeed, the profit margins typically are
higher in the business jet industry. What they did was
(05:54):
basically a form of arbitrage. They recognized that the margins
they'd enjoy in business aircraft would be higher than regional
but maybe perhaps a little bit lower than the traditional
business jed companies like Cessna or Oker, Beachcraft or Bombardier.
So therefore, if they were aggressive about pricing, their margins
would go up, but they could still get into that
(06:16):
business aviation market. And to this day, business aviation has
been effectively constituted as the third leg of MBRERE. The
first original was sort of on the military side, then
the big breakthrough scheduled air transports, and now also business aviation.
Speaker 3 (06:31):
So you mentioned smaller regional commercial plans, So just to
be clear, they don't have like a big wide body
like Boeing and Airbus two.
Speaker 5 (06:41):
They don't really have a big wide body at all,
and they don't even have a proper narrow body unfortunately,
and the entire airline world would love them to develop
a traditional mainline narrow body at this point. As a
matter of fact, I think they're crying out for it
because Boeing is stumbling very badly as the second place.
The Airbus's doing great, but they've got backlogs that are
(07:02):
ten years long. So get wine. Eventually you'll get your jet.
People are crying for Embrayer to do something bigger than
the kind of large regional jets that they've been doing.
The one five E two series is kind of right
on that border between regional jet and mainline jet. But
you know, it can't do say transcn us or something
(07:23):
that a seven thirty seven Nax or an a three
to twenty Neo can do. Routinely, But boy, what airlines
love them to develop a new product that did that.
Speaker 2 (07:31):
How is it that a Brazilian company is in a
position where the world's aviation market or airlines are crying
out for it to develop a narrow body because in
some respects, you know, we have national aerospace companies in
other places. So the last time we had you on
the podcast, we talked about Comac for a little bit.
(07:52):
In Russia, there's Tupulev and I can't remember the other one.
I think it starts with an US. But those haven't
really broken out of their local markets in the way
that ember Air has. How have they managed to do that?
Speaker 5 (08:07):
Well, you've got to go back to that. I don't
want to say those great old days because they weren't great.
But everyone thought, gee, we should carbon factory in the
jungle and build our own cars, aircraft, computers, whatever else.
And so many people tried that. There were some truly
spectacular failures. In Latin America you had FMA and Argentina
and Air and Chile. In Indonesia you had IPT and
(08:30):
lots of people had that idea. The Japanese tried it,
lots of people, and the Chinese and Russians have been
sort of screwing around with it for some time. Also,
Ambrayer could have easily gone down that path of failure,
but a couple of things happened. One they hit paydirt
with a couple of key products, most notably the embreyor
one twenty, which was a turboprop transport that really proved
(08:53):
quite popular in North America back in the nineteen eighties.
And after that, rather than basically can on that government
owned government hobby shop that they had been on and
others had been on, they decided to privatize, and they
did that extremely successfully in the nineties. And then on
top of that, they continued that engineering driven culture. They
(09:14):
had a lot of their people who came from a
school that they and the government kind of co owned
that basically proved a terrific farm for engineers and executives
going into the airspace business. Ita, I believe, and this
culture has prevailed to this day despite privatization. They've managed
to come up with a very happy combination of government
(09:37):
driven industrial policy transformed into something that is sustainable and profitable.
Speaker 3 (09:43):
I'm going to ask a really big zoom out question
because I realize I'm very ignorant of this, and I like, Oh,
there's a big plane that's a wide body, and then
there's a less big plane that I called a narrowbody,
but maybe it's not technically a narrowbody. I realized I
actually don't know any of this. Perhaps there are some
listeners who are the same. Can you talk about actually
just define some of the key segments of the commercial
(10:06):
aviation business broadly, and then with EMBRA air in the
markets they compete in. What do we talk about in
terms of market share?
Speaker 5 (10:12):
Yeah, first of all, commercial jet transport, That of course
is airline travel, and that has three flavors. One is
a wide body, which is typically for intercontinental international routes,
and it's very simple. You get on board and they're
two aisles rather than one. Only Airbus and Boeing do those.
China would like to get into that. The only country
(10:33):
in the world outside the US that ever did its
own was the old Soviet Union. Europe only did it
by pooling their resources and creating Airbus. Then you've got
narrow bodies, which are basically for mainline jet operations, single
aisle in the middle, typically starting at about one hundred
and twenty hundred and thirty passengers and a minimum of
(10:55):
say three thousand autical miles or something like that. Then
you've got regional jets which look kind of like small
trunken narrow bodies that just don't have the rains. They
typically max out at maybe fifteen hundred nautical miles and
typically about one hundred and twenty people, so they're not
below and embrayor has produced either the very smallest narrow
bodies or the very biggest regional jets you can possibly
(11:17):
find it or create, and they've done incredibly well with them,
like wow, that's a really quality product. But they simply
don't satisfy the requirements for airlines that want to do
traditional mainline trans con routes with a sufficient number of sizes.
I think Southwest for example. You know, the smallest Southwest
plane is just slightly bigger and more capable than the
(11:38):
biggest Embraer aircraft. In terms of military you know, they
were originally created effectively, is to put it gently, a
kind of a hobby shop for the fascist Hunta in
Brazil circa you know, sixty seventy years ago. So they
did basic military self sufficiency sort of stuff. But they've
evolved and it produced some pretty impressive aircraft and right
(11:59):
now co producing grief Invider jets designed by SAB for
the Brazilian Air Force. Most impressively, they've created this remarkable
military transport, the Case three to ninety, which can also
do air to air refueling for the Brazilian Air Force
and for export customers. It's a remarkable creation typically for
(12:19):
Embra Air, designed on time and on budget, so that
just goes to show what they can do. And then
finally the third leg business aircraft, individual owners and operators,
fractional share providers, anybody who's catering to wealthy people and
wealthy companies that want their own form of private travel.
Speaker 2 (12:55):
Joe, I always like looking at the regional jets because
you've got some weird ones, and you've got some weird
branding choices too. So I remember I was on I
guess it must have been like Austrian Airlines, and it
was a Dash eight from de Haveland, so a little turboprop,
and on the engine they had written in cursive the
Sounds of Silence, and that was the branding for the engine.
(13:17):
And I remember sitting there about to take off, just
thinking like silence is not the thing you want to
hear when you're on a turbo prop soaring above the mountains.
Speaker 3 (13:27):
I get, yeah, a little macaw, maybe a little Yeah.
Speaker 2 (13:31):
There's also there's a kind of weird Bombardier. I don't
even know if this would count as a regional jet
because I think it's for military use, but it has
like this really weird nose. If you look it up,
it's like.
Speaker 5 (13:44):
The Yeah, the Bombardier cr Jason. Yeah, there's inverted to
various military uses. What's interesting is that Bombardier was originally
the third biggest airframer and they kind of mostly died.
They're now the world's only pure play publicly jet Prime.
Everything else has been sold off after they kind of
at the company on something that cost way too much,
(14:07):
so Embray Air was left with the keys to the kingdom.
In terms of market share, they've got one hundred percent
of the regional jet market, a great place to be,
and a perfectly respectable single digit percentage of the business
aircraft market.
Speaker 6 (14:20):
And they really have.
Speaker 3 (14:21):
They have one hundred percent in that regional So we're
talking about the US or where one hundred percent. That
sounds crazy.
Speaker 5 (14:28):
There's no one else competing with them in regional jets. Nominally,
the Chinese are building the AARJ twenty one for Chinese customers.
Not sure i'd count it, but if you did, you
know it would be ninety ten or whatever.
Speaker 2 (14:39):
That's crazy. So I remember, you just jogged my memory, Richard.
But when I was covering airlines in like circa two
thousand and eight, I remember writing Bombardier headlines all the time,
and then they just kind of like, yeah, it.
Speaker 3 (14:52):
Was something in like twenty fifteen. I remember when I
just joined Bloomberg and there was a bunch of stuff.
What happened with them? Because I remember, yeah, the headline
where they going to be saved or bought or bailed
out or something.
Speaker 5 (15:04):
Yeah, that's right, And basically they decided to make that
leap into narrow bodies. They developed or tried to develop,
something called the C series, which was exactly in that
low end Airbus and Boeing class, and they bit off
more than they could chew. They counted on the Canadian
government and the Quebec government provincial government bailing them out,
which to a certain extent worked, but boy, they just
(15:27):
kept needing money and it became a giant money pit,
and eventually they had to pay Airbus to take this
jet off their hands so they could say, oh, please,
let us at least, you know, salvage something from this
terrible experience. And now it's known as the Airbus A
two twenty is a good jet. But Bombardier was forced
to sell off everything, including its regional jet division, which
(15:49):
the Japanese bought to no purpose or end. And all
Bombardier does now is business jets. Thankfully, they do them
very well and it's a good company, but they ve
exy did everything else.
Speaker 2 (16:00):
So going back to the sort of nineteen seventies nineteen
sixties aspect of all of this, so you laid out
very clearly the idea that there were a lot of
different countries that had national champions in terms of aerospace companies.
Everyone's trying to make their own car or make their
own plane or whatever. And when I think about that time,
(16:21):
I think about protectionism for some of those industries as well.
And so I guess the thing I'm wondering is, how
did a company like mbreer get a foothold in the US.
Was there some sort of like deregulation or liberalization of
the market that allowed it to get in there.
Speaker 5 (16:39):
Yeah, this is absolutely a key thing to explore, and
it's something unique to the aircraft industry that you can't
really do autarchy. A lot of the theories of Latin
American and other emerging country developments revolved around autarchy, our
own demand, our own whatever. You can't do that with aircraft.
You just can't because seventy eighty percent of the value
(17:00):
of an aircraft is in extremely technical parts. You know,
you might be able to do your own aircraft. Good
luck doing your own turbine engine, or your own avionic
system or your own auxiliary power unit or whatever else.
That's all coming from somebody else. And they recognized that,
and they said, you know again, great management. They said, oh,
we have to be a systems integrator like Dell Computer. Okay,
(17:21):
And I think I think sometime in the early nineties
Jeffrey Sachs the economists the great observation. They're Brazil's greatest exporter.
They're also one of their biggest importers. They have to
that's the way it works.
Speaker 3 (17:33):
So one of the other striking things is they have
this dominant market share in specific categories. It's impressive, it's profitable,
which is you know, not always a given. It's also
very small from a market cap standpoint, It's just a
five billion dollar company. Boeing is one hundred and nine
billion dollar companies, So it could lose five billion dollars
in market cap on a random Monday with like a
(17:55):
bad headline. What is the constraint there? Is it not
really been optimized? These just not that big markets that
it's playing in, even if it has dominant share, Is
it not that profitable? Has it not been run? I mean,
arguably one of the challenges or one of the complaints
leveled at Boeing it's, you know, it's been run too
aggressively to make profits at the cost of reliable planes.
(18:18):
Is there a situation kind of the opposite where it's
been less sort of focused on creating shareholder value.
Speaker 5 (18:25):
You know, it's just really hard to break out of
their swim lanes. They developed a couple of business jets,
or of them to be exact, that are really great
business jets, but you have to have more than that
to achieve critical mass. Similarly, regional jets, you know, the
three buckets and scheduled air transport. Regional jets are like
(18:46):
maybe five percent of the whole business, so it's really
tough to break out of that. And of course they're
military share. Well, the military market's unbelievably fragmented, so no
matter how good you are, you're not going to build
an F thirty five fighter jet. You're going to get
have a tiny, tiny share. So they're very well run.
They tend to be a bit conservative, that is true,
and here we are today where all the world's airlines
(19:09):
love them and trust them and want them to develop
a jet that would compete with Airbus and Boeing. But
it's really tough to make that leap.
Speaker 2 (19:17):
Why the reticence, Yeah.
Speaker 5 (19:19):
Well, give you an idea. You know, when Marty a
bet the company on that C series I mentioned before,
they were a twenty billion dollars a year company. So
imagine if you're a five or six billion dollar company
and you're asked to make that giant investment in a
narrow body aircraft. You'd better have some very deep pocketed
partners helping you to do that, and maybe they'll line
(19:40):
those up. But the idea of doing it on their own,
that's like asking one of us to go and win
the Nobel Prize in physics it's just a big just
really hard.
Speaker 2 (19:50):
How much synergy is there between building a regional jet
versus like the next level up a narrow body, Like
is it just a matter of you know, taking all
the components and spreading a model, Yeah, increasing them by
twenty percent or something like that. Or what's actually the
difference in terms of engineering.
Speaker 5 (20:09):
Yeah, that's a great question. It's really financial bandwidth in
terms of skill set very similar. Good program management and
great connections between the people at the top. This is
what's gone wrong at Bowing, the connections between the people
at the top and the people engaged in the company's
core business of designing and building planes. It's gone horribly wrong.
And dembrare No, they're pretty darn good. So good program management,
(20:33):
good company management, good systems engineering, good systems integration. They're
great at all of us. The case three ninety most
effectively illustrates that new military transport. What we're just talking
about is that as you get bigger in size class,
oh boy, their requirement for cash bros exponentially, so that
(20:53):
C series total spend at the end of the day
about seven billion dollars maybe eight billion in today's money.
You know, back then four or five almost broke the
company really really hard to get, and that was something
that was smaller that I think that Embryer would like
to do. Embryer, I think would love to do a
one hundred and eighty or two hundred feet jed. They're
(21:15):
going to need something on the order of eleven twelve
billion dollars in today's money, and that's just not going
to come from a five billion dollar a year in
revenue company.
Speaker 3 (21:25):
I'm sort of realizing, Tracy, because you know, my first
question is like, oh, what's so impressive about this company,
And the answer is the fact that they can make
airplanes at all consistently puts them into such a narrow
company that almost by definition, it is impressive. Do you
think at some point they will or is it just
they will try to like level up to another scale
and compete in a new market, or is that risk
(21:48):
of just sort of betting the whole house on a
new thing and not being able to sure you can
do it just like too inherently risky for a company.
Speaker 5 (21:55):
Besides, yeah, they just aren't going to do it on
their own. It's just physically not possible. Again, for the
same reason, I won't get that Nuclear Physics Prize any times.
In However, what is sort of intriguing is there are
game changers out there. You've got these very large US
defense primes that might be looking to diversify into adjacencies,
(22:15):
and some of them are assistance providers too, like an
RTX or a GE or you know, even a North
of Crumen. On the on the pure point defense side,
maybe someone say, hey, this is an intriguing possibility. But
then even more intriguing, you've got these economies in the
Arab Gulf, Saudi Arabia and the UA looking to diversify
with vast oil revenue. Maybe they could work with Embreyer
(22:39):
and say, hey, this is intriguing. Now. The problem is,
of course, you know what's in it for them. How
do you have this great culture of engineering in Brazil
and somehow migrate that to reodd or something that's really
super tricky. In the track record of aircraft companies working
with people who have money and want to get into it,
it's not a great track record. Taiwan and McDonald douglas
(23:01):
tried that three decades ago. Didn't go so good. But
you can't rule it out and the amount of money
that's slashing around in the oil states. Is it wouldn't
even move the needle. If they were to say, here's
twelve billion, let's build a jet. You wouldn't even show
up and it wouldn't even show up in their balance sheet.
It's walking around money.
Speaker 2 (23:20):
Maybe soft Bank can give them like fifty billion or something.
Why not be better then going into like some new
SaaS company. Okay, I have just one more question, and
this is something that I read a number of times
when I was researching what makes Embraer special and people
kept saying it's also ease of the mechanics. So the
(23:43):
idea that it can be fixed up pretty quickly and
pretty simply, and that's probably important if it's a smaller
jet that's going into smaller airports or more far flung
locations where resources are more limited. And I guess my
question is a is that true? And then be how
do you achieve that? Because my assumption would have been
(24:03):
that every aerospace manufacturer in the world would be trying
to create a problem free aircraft that doesn't need a
lot of work on it.
Speaker 3 (24:11):
And I'll just add a quick c onto Tracy's question.
But do the constraints of having to operate in a
country like Brazil or regional areas like that, do they
have a forcing effect on achieving that result of simplicity
and ease of prioritizing things like ease of repair, stuff
like that.
Speaker 5 (24:30):
Will you go back to the origins of the company,
when they were designing planes like the embryor one ten
Bandirante and other planes. You know it's agricultural aircraft. They
were all too mindful of the rather difficult operating circumstances
of a developing country like Brazil back then, and they've
had that mindset ever since. Now, our regional jets, remember,
our business jets, remember, are more maintainable than others. Not really,
(24:55):
but what they have gotten as a consequence of that
experience is an awareness of the important a good product support.
And it takes that background, that experience to realize that.
Like right now, you know, you've got everyone talking about
COMAC and China. Yes, excuse me, you need a worldwide
global support infrastructure before we even talk about exports, and
(25:17):
they're like, we need what now? And that is one
of the very biggest barriers to entry. And because of
embraer As origins, recognizing the importance of maintainability. They've always
emphasized that, they've always been really good about it. So
since World War Two, there's exactly been one country and
(25:37):
one company that has successfully entered the industry of building
commercial airliners, and that's Embray Air. That's incredible. Maybe the
Chinese are almost there, maybe we don't quite know. They
certainly haven't done so on an export basis the way
Embrey Air has. But in the historical context of everyone
trying to get into this industry and everybody failing, Embraer
(26:00):
stands out as a remarkable success story.
Speaker 3 (26:04):
Richard, thank you so much for coming back on the show.
That was fantastic.
Speaker 5 (26:08):
No, it's my pleasure, thank you.
Speaker 3 (26:24):
That was our conversation with Richard Abu Lafi about the
extraordinary success of embra Airbud. We want to understand more
about where this company came from and the sort of
political and economic environment in Brazil out from which it emerged.
So we're going to be speaking with Juan David Rojas.
He is a calumnist on Latam issues at Compact Magazine
(26:45):
as well as a contributor to American Affairs. So Wan,
thank you so much for coming on the podcast.
Speaker 6 (26:51):
Thanks for having me on big fan of the show.
Speaker 3 (26:53):
Thank you so much. So we had the conversation with Richard,
we sort of got a rough outline of the history
of embra a is founded in Brazil in nineteen sixty nine,
what was going on in Brazil economically or politically, and
maybe perhaps even across Latam such that the country felt
(27:14):
it necessary to have some sort of homegrown aviation company.
Speaker 4 (27:19):
So between the nineteen thirties and the nineteen eighties or so,
in Brazil and across most of Latin America, but in Brazil,
starting with the government of Jiduliu Ovodagas, you had consecutive
administrations from across the ideological spectrum, both democratic and authoritarian.
Speaker 6 (27:35):
Marcus is actually a great figure to look into there.
Speaker 4 (27:37):
But it promoted what were called ISI policies, import substitution, industrialization,
and in a nutshell, what that means is they used
protectionist measures, tear subsidies alike to both block the import
of industrial goods and foster the development of those same
products domestically. And this is actually what we've seen Brazil
do just weeks ago, along with a number of other
(27:59):
countries Mexico, the EU US raising tariffs against Chinese evs
and solar panels. So the idea is that, you know,
we want to develop our own EV industry. We can't
compete with China as such right now. We don't want
to import their goods. Now in Latin America is SI
policies get a bit of a bad rap with some
good reason, but they really shouldn't. Why today in Brazil,
(28:23):
of its twenty largest companies, half either were now or
at one point worse they don't. These are you know, Petrobras, Volley, CSN,
electro Bras, and of course Embiety. In each of these cases,
it took decades and loads of failures before any of
these companies became profitable. That's just industrial policy, one on one.
Depending on the industry in question, there's learning curves where
(28:46):
failure necessarily contributes to long term success. And what's said
is that around the time that Embiet was created, right
in the middle of the ISI period, Brazil was something
of an industrial powerhouse in the.
Speaker 6 (28:59):
Region, specifically in auto manufacturing.
Speaker 4 (29:02):
Again, a lot of these companies weren't necessarily profitable and
there were ambiguous failures which as in like nuclear power
and computers in Brazil, for example, but they were high
value sectors that contributed to huge gains both in productivity
and GDP growth. For perspective, average GDP growth in Brazil
during the ISI period was around five percent a year,
(29:23):
and since the eighties nineties it's been around two percent,
with productivity being stagnant.
Speaker 6 (29:28):
And you know, this makes a.
Speaker 4 (29:29):
Lot of sense because what we've seen since the nineties
is that Brazil's economy has really transitioned towards mining and
agriculture versus manufacturing, which manufacturing inherently is more beneficial towards
productivity growth.
Speaker 6 (29:43):
You know, starting in the.
Speaker 4 (29:44):
Nineties, industrial policy became kind of a bio word for
cronyism and an efficiency, and you haven't really seen efforts
in Brazil to develop high value sectors and new industries
where economies of scale are important, like aviation of the
companies I mentioned. You know, this makes sense. What were
these you know, Petrobrass, Pally, et cetera. They're all in
minding hydrocarbons. Ironically, still thanks to past industrial policy, which
(30:09):
isn't to say that privatization some of these cases was useful,
but Ambia it really is the outlier here and that
it's an aviation manufacturing.
Speaker 2 (30:17):
From So can I ask you to dive a little
bit more into the political atmosphere when Embrer was created,
because my understanding is that, okay, it had some roots
in the nineteen forties and the nineteen fifties, but it
wasn't until nineteen sixty nine, as Joe mentioned, that it
was really crystallized into a company. And of course, Brazil
(30:40):
in nineteen sixty nine was undergoing a lot of political change,
and sometimes when people talk about industrial policy, there is
an implication or a connotation that in order to have
very fast industrial development sometimes you need a command economy
or a dictatorship of some sort, and that was sort
(31:00):
of my understanding is that was kind of the background
in nineteen sixty nine.
Speaker 4 (31:05):
Yeah, that's exactly right. It's a really interesting point. There
was a twenty year military dictatorship in Brazil. Took power
in nineteen sixty four, left power in nineteen eighty five.
They actually created Embrae because in the decades up to
that point, the past governments tried to promote aviation solely
in the private sector and it.
Speaker 6 (31:25):
Didn't really work.
Speaker 4 (31:26):
Actually, interestingly, from the beginning, MBRAAD was a mixed private
public enterprise with the government holding only a fifty one
percent stake. And Brazil's military dictatorship was also interesting in that,
unlike Pinochet's dictatorship, were the last military dictatorship in Argentina,
they had more of a developmentalist but whereas you know,
(31:46):
the ideas of the Chicago Boys were more prominent in
Argentina during the seventies and eighties and Chile as well.
But importantly with mbraet and Aviation, as Brazil, there was
a concerted and consistent and effort over decades to really
develop the company and aviation. Richard mentioned the CTA, and
I want to say a little bit on that they
(32:08):
did this right and that they laid the groundwork through
the CTA and all THEA in the translation it's like
Technical Aerospace Center and it was modeled after Yeah, they
was modeled after MIT. They actually brought an MIT professor,
Richard Smith, and they developed all of these research institutes
(32:29):
that would focus on developing different designs for different planes
and the like. It actually produced one of EMBI had's
founders and longtime CEO, z D Silva. And this is
a guy, yeah, I want to mention because he's just incredible.
He was both a pilot and an aerospace engineer. He
actually worked on the prototype for the Bunday Nunchi, which
(32:51):
was EMBI had flagship program since its inception.
Speaker 6 (32:55):
Actually funny story.
Speaker 4 (32:56):
He left after like eighty six and then came back
once the company was privatized. But he was flying a
Shinghu which was actually a jet that unfortunately failed. But
he was on his way back from Brazilia with President
Samne to Sojous campus and he reportedly was one of
(33:19):
the first people to see Brazil's nineteen eighty six UFO incident.
There were like twenty like flashing lights all around so
Jose campus and it's famous in UFO lore.
Speaker 6 (33:30):
But it's just kind of funny. He was one of
the first people to see it.
Speaker 3 (33:33):
I'd never heard the nineteen eighty six Brazilian UFO incident.
May nineteen eighties series of radar and visual contexts.
Speaker 2 (33:40):
This is going to establish a new precedent of all
all thoughts. Guests must come prepared with one piece of
uf UFO r Yes.
Speaker 3 (33:49):
Wow, it's crazy. Yeah, it really happened. Huh okay, I'm
a believe that. Just to stay on the politics, the
military dictatorships are not that uncommon from time to time
around the world, particularly not that uncommon at various times
in the twentieth century in Latin America. But I hadn't
really thought about that that you do get sort of
(34:10):
different flavors of them from an ideological perspective. So it's interesting,
as you say, Chile sort of famously bringing in people
to give advice from the University of Chicago. Somewhat infamously,
I suppose, but it's interesting as you see your point,
maybe you can expand on that that the Brazilian one
had a very different attitude towards domestic economic development.
Speaker 6 (34:32):
Yeah, you know, I'll step back a second.
Speaker 4 (34:34):
If we think about all the countries in Latin America
where a company like embiad would really succeed, it makes
a lot of sense that Brazil would be it. It's
a massive country with multiple major cities far apart, making
aviation critical for both national security and commercial purposes. On
the latter that benefits from economies of scale. We're given
(34:55):
that Brazil has a large domestic market. There's a lot
of mo parts here, but really the intermingling, and you
could say this about a lot of other similar companies
around the world. The intermingling between the military and commercial
divisions of the company, particularly in Biet's case where exports
became prominent, was critical. You know, you think about it,
(35:17):
you need the military as a source of stable demand,
given that business cycles and aviation can be really volatile
and revenue tends to be limited, especially in a country
like Brazil. On the other hand, the potential for waste
as a monopoly or oligopolistic firm, depending on the state
military lends itself to the classic problem of protectionism. At
(35:39):
one point, the military insisted that all public sector planes
had to be purchased from MBIET and that all travels
should take place on those planes. And crucially, after sixty four,
the US imposed restrictions on military aid and weapons sales
in a similar way now to Russia, to force them
to rely on their own domestic industry. But the way
(36:00):
you mitigate that potential for croniism and the like is
by gearing your commercial operation towards exports and foreign markets,
particularly if you can find a niche, which is something
you guys.
Speaker 6 (36:10):
Talk with Richard about.
Speaker 2 (36:12):
I hadn't realized that, but it actually it makes a
lot of sense. The idea that Brazil is a very
large country with a lot of remote areas, and so
it really needs aircraft in many ways. But I guess
one thing I'm kind of curious about is when Brazil
was developing Emberer, what was the argument for comparative advantage
(36:34):
if there was one, Like, was there a moment in
time when people said, like, Okay, we need aircraft and
we can develop them in house. And lots of countries
are developing their own national aerospace companies at that time,
But was there a moment where they said and will
be better at it than other people.
Speaker 4 (36:53):
That's a really interesting question, and it goes back to
that point on finding the correct niche. It's important to
keep in mind that Mbiada came onto the scene very
late in the history of aviation. At this point, Argentina's FMA,
for example, was way ahead of MBI had to say
nothing of peers and developed countries. Very astutely, the leadership
(37:14):
of the company looked at the global landscape and said,
you know what, there's no way we can compete with
what's coming out of Europe. In the US, is there
a place where we can specialize and so lo and
behold By the early seventies, they.
Speaker 6 (37:26):
Produced the Ipanima and Shamanchi.
Speaker 4 (37:29):
The first one was a small agricultural spray plane and
the second a small jet fighter that was designed by
one of the CTA's research institutes. Then in seventy three
they unveiled the bund Nuncia, a nineteen seat turboprop plane
with around five hundred models sold mostly to the Brazilian military.
(37:51):
And almost immediately after this the firm made this strategic
decision of orienting itself towards exports and engaging with partnerships
with foreign peers. When you talk about like developmentalism in
Latin America, you often see the region compared to the
Asian tigers, where the explanation will be the ISI policies
worked in you know, like Taiwan, South Korea, et cetera,
(38:14):
because they geared their industries towards explorts rather than just
the internal market, which was more prominent in most Latin
American countries and with most firms.
Speaker 3 (38:25):
So you mentioned that by the time Embrer came into existence,
Argentina already had an aviation company FMA, which I'm just
looking at Wikipedia right now apparently was founded in nineteen
twenty seven, which seems but maybe.
Speaker 6 (38:40):
Yeah, yeah, right around the time. Actually, so what happened?
Speaker 3 (38:43):
Can you maybe give us the short compare and contrast
version of why regional carriers in the US are not
flying on little planes made by FMA.
Speaker 6 (38:54):
There's a lot more history than you know.
Speaker 4 (38:56):
Embrad went through a lot and saw are of failures,
but you know, you compare it to FMA and it's
just night and day. Why And it's sad because the
FM had that advantage they started so many decades earlier.
Speaker 6 (39:12):
And this is to give you an idea.
Speaker 4 (39:13):
It was first created I think in twenty seven by
secret decree and as a result of you can believe this,
there are no audits or financial records from the Argentine government.
And you know, another factor that's important too is the
fact that Brazil, you know, they had this twenty year
military dictatorship, but comparatively, there was a lot more stability.
(39:36):
That military dictatorship lasted a lot longer, and there was
continuity between these dictatorial and democratic governments. In Argentina during
the twentieth century, there were like I think something like
thirty something coups, and they had this effort during and
after the Second World War in Argentina. You know, bet
(39:57):
On famously took in a lot of Germans from Nazi
Germany and apparently.
Speaker 6 (40:04):
They didn't jive well with the Argentines.
Speaker 4 (40:07):
I have a few good data points on here that
in just five years fifty five and sixty they went
through nine different directors with a maximum term of twenty
three months, and it was just extremely volatile.
Speaker 6 (40:20):
It was just a complete disaster.
Speaker 4 (40:22):
And then, but I add the difference was that they
really specialized in going after these small and later regional jets.
Speaker 6 (40:30):
That then the regional ones took off in.
Speaker 4 (40:33):
The nineties after the company privatized, and they ended up
privatizing FMA also in the nineties, and that was a
complete disaster. Is run by Lockheed and they promised to
like not layoff with some of the workers and made
other promises, broke all of them. But the Argentine states
still look the other way.
Speaker 2 (41:07):
Going back to mbreer, can you talk to us about
I guess its role in the overall Brazilian economy, because
this is something I was thinking about. We did that
episode with Ricardo Houseman where he was talking about.
Speaker 3 (41:20):
That episode is very much in the background of my mind.
Speaker 2 (41:23):
Yeah, and he was talking about, you know this idea
that once a country develops one industry, it sort of
leads to other industries where there are synergies or where
that technological knowledge can be built upon. So I'm curious, like,
were there other trees that Mbreer actually led to within
(41:44):
the Brazilian economy.
Speaker 4 (41:46):
The military industrial sector had a number of different firms
and actually, when that comes to mind right now, unfortunately
because it runs the risk of being acquired by a
foreign company, AVI Bras, which specialized and make a number
of military hardware, and the CTA it was based out of,
(42:06):
so Jouzebu's comp was in the state of sal Pablo
is kind of known as Brazil's silicon valley, and that
actually turned into this huge industrial hub. I believe Lula
actually worked out of there when he was a union
leader for the Brazil's Metallurgy Union. And I had as
a pretty small company. It's worth only about what like
(42:28):
five billion dollars. And unfortunately, what we saw after the
nineties is that a lot of Brazil's industry in manufacturing
really collapsed because of the fact that they liberalized trade
and privatized a lot of these companies. Some of them
did better, like Petrobras and Voley, for instance, but a
lot of the indigenous auto manufacturing firms basically collapsed overnight, unfortunately.
Speaker 3 (42:54):
So this touches on a couple of things what I
was going to ask next, But in your view, I mean,
the whole reason we're interested in Amber Air in the
first place is because two things, right. The first is
it's really hard to make a plane, period, and we
see that in the US, and we see that in China,
and I guess Europe seems to be doing fine with
(43:16):
making planes at Airbus, but objectively speaking, building a reliable
commercial plane is really difficult, so that's very unlikely. And
then b there are just not many advanced manufacturing success
stories in Latin America period, which sort of touches on
the question that Tracy just asked about. So part of
the question here is like what happened such that A Like,
(43:39):
how is there this one company that managed to overcome
two very unlikely things happening? And b is it just
a matter of premature liberalization? And your viewer like, what
are the factors that cause that there aren't more Embra airrors?
You know, why isn't there a Brazilian byd or whatever
it is.
Speaker 6 (43:57):
As far as why am but I had succeeded, a
lot of it is luck.
Speaker 4 (44:00):
A lot of it is just smart investments, really good
competence and cultivating talent for this company. But as far
as why there isn't a Brazilian bid, you know, there's
this automaker in Brazil, Bouguel. Its president was known as
the Brazilian Henry Ford. And to be honest, most of
(44:21):
the cars that this company made weren't great, but a
lot of them had potential.
Speaker 6 (44:25):
They were actually.
Speaker 4 (44:26):
Making evs during the seventies and eighties. They were these
small little cars, and the jeeps that they made were
pretty good. Unfortunately, after they removed tariffs and allowed competition
with imports in the nineties, the company went bankrupt in
nineteen ninety six.
Speaker 6 (44:43):
And we talk about premature liberalization.
Speaker 4 (44:47):
It's interesting because what I would argue with the company
like that is that you don't want to just prop
up these companies unnecessarily, especially if they're not giving results.
But if there's potential there, things maybe would have been different. If,
let's say, policymakers have said, you know what, we don't
want you to fail, but we want to see results,
you need to gear your operation towards exports, and we're
(45:09):
going to condition a lot of our support on increasing production,
et cetera.
Speaker 2 (45:13):
What's the new industrial policy in Brazil? I keep hearing
about that, and I guess the big question is when
you say new industrial policy, how does that differ from
the old industrial policy?
Speaker 4 (45:25):
Lula, I believe it was earlier this year unveiled what
he called his new Industrial Plan. I think it is
where I forget exactly the figure, including you know, a
bunch of subsidies, local content requirements, credit lines in order
to attract investments, specifically in manufacturing. And actually the results
so far are pretty good. The landis buyd great Wall Motors.
(45:50):
A number of key firms have opened up plants in
Brazil and the idea is to be able to benefit
from that technology transfer.
Speaker 6 (45:59):
And it's you know, it's just it's one thing just.
Speaker 4 (46:01):
If foreign multinationals are opening up plants in your country.
Another is that you can really actually learn from them
and then create your own firms.
Speaker 3 (46:11):
There's been plants in Mexico for a long time, US
automaker plants, but Mexico does not have as far as
I know, a rising domestic auto industry of its own.
What are the barriers? Why is it that in some
cases it's in theory that works. You have some foreign
automakers like Ford set up a plant, and then there's
no how, and then there's domestic building and there's rising
(46:31):
the value chain, and then sometimes you're still just basically
capturing only a modest share of value as a place
for and finishing, and it doesn't spread out.
Speaker 4 (46:41):
Mexico is really today one of the few put countries
in Latin America that has a really robust manufacturing sector.
But as you stated, it's all really just assembly. They
just import inputs from abroad, assemble these finished goods and
send them to the US. And this is actually how
a lot of the Asian tigers started out Taiwan and Singapore,
(47:04):
et cetera. They started out assembling these goods and then
exporting them. But they eventually graduated such the point where
you know, they developed companies like Samsung, TSMC the like.
And exactly why that hasn't happened in Mexico, for instance,
in other Latin American countries, it's hard to say. I
(47:25):
think we could chalk it up to an extent to
a lack of imagination honestly.
Speaker 2 (47:31):
So on that note, I mean, I know your expertise
is Latin America, but do you think nowadays you could
have a repeat of an Embraer in the sense that
you could have, you know, a homegrown high tech industry
despite the idea that there are all these you know,
quite high barriers to entry, especially for something as complex
(47:53):
as building aircraft.
Speaker 4 (47:55):
That's a tough question because if it were to happen,
it would take deck and it would take decades for
us to see a firm that's really successful. I meant
to get into this, EMBI had was really in crisis
mode during much of the eighties and early nineties. Why
during the seventies, Brazil saw this huge boom upwards of
(48:18):
like ten percent growth each year, and they were investing
in all of these manufacturing companies, but a lot of
that was financed with external debt. You get to seventy nine,
I believe in mister Volker, and the Federal Reserve starts
massively raising interest rates. This causes a huge crisis in
Brazil that causes the country's debt to explode and similarly
(48:40):
affected a lot of other countries in Latin America. You
guys might have heard the term the last decade for
to the nineteen eighties. Interestingly, actually in Brazil up until
like eighty five, the military their view was that they
could pay down some of their debt by promoting exports,
and they ran these huge surflas. Since then after eighty
(49:02):
five they started more of an austerity regime. There was
also a slump in the early nineties because of the
golf War, but the company was given like a half
a billion dollar rescue package. But when it was finally privatized,
it actually had to be put up for auction like
five times because it was viewed as so undesirable.
Speaker 3 (49:21):
So that's interesting, the vulgar shock sort of clobbering the
economies of countries that had gone into debt to do
domestic investment. You mentioned the golf war downturn, which I
hadn't thought about. But after the military dictatorship ended after
twenty years and then the company went private, Like, what
(49:42):
was the sort of policy stance of the government at
that time. Was it a sort of sort of classic
Washington consensus pursue that kind of liberalism? Like what was
the environment the domestic policy environment during that sort of
those rough years in the eighties and nineties.
Speaker 6 (49:58):
You know, I think you I could say it's a
bit of both.
Speaker 4 (50:01):
The key thing is that when the company was privatized,
the government kept what's called the golden share, giving them,
you know, veto power over changes in ownership and really
strategic decisions with regards to.
Speaker 6 (50:14):
The running of the company.
Speaker 4 (50:15):
And it's really because of this golden share that the
company is still a Brazilian company. Avibas actually, which I
mentioned before, was completely privatized. The government kept zero ownership,
and it's because of that that it runs the risk
now of being sold off and no longer being Brazilian.
They had this pre privatization venture into I think it
(50:37):
was the erj that really took off after privatization. There's
all these interests in regional jets.
Speaker 6 (50:44):
But on the one hand, there was a more lase
a fair approach.
Speaker 4 (50:48):
But you know, because aviation manufacturers it is really necessary
to have support from the government.
Speaker 6 (50:55):
I mean, you know, Boeing and the like their government contractors.
Speaker 4 (51:00):
The support that I had received from the Brazilian state
was similar to its more developed peers.
Speaker 6 (51:06):
You know, they're still subsidized and the.
Speaker 3 (51:08):
Like one David Rojas, thank you so much for coming
out odd luck.
Speaker 6 (51:12):
That was great. Thanks to ton guys.
Speaker 3 (51:26):
Tracy. I'm really glad we finally did an EMBRA air episode.
I think my big takeaway is it's really hard to
make an airplane, and you also just need a lot
of luck.
Speaker 2 (51:37):
Yeah, it's funny you say that. I was about to
say the exact same thing, like there's a tendency to
think like, oh, they must have done all the right things,
or there's some sort of like insight that you can
pull out of this one specific example. But it seems
in some respects like, yeah, they got lucky. They made
some good decisions, they had some good management. I guess
(51:58):
the one thing that they did was identify that niche right.
And the other thing I was thinking about is actually
Quan hit upon it really well in that second part
where he was talking about how the geography of Brazil
kind of lent itself to the need for aircraft, and
I guess within that you would want lots of regional
or smaller jets because you're going to more remote locations
(52:21):
and probably not you know, big metropolitan centers all the time,
and so in some respects it kind of lent itself
to that regional jet or business jet idea totally.
Speaker 3 (52:31):
It dovetails with the point Richard made to that one
of the preconditions for establishing any sort of aviation company
at scale is that really excellent customer support or customer
service network. And so you think, like, well, one reason
why Brazil and not any other country in Latin America
is just by luck, I guess, the sheer size and
(52:53):
the sheer necessity of having to build out all that
stuff at scale just to even serve the domestic market.
Speaker 2 (53:00):
Absolutely. The other thing that I think is interesting is
that idea of like synergistic economic development. And I guess
we shouldn't make this a three parter, but maybe we
need to get Houseman on to explain why Amber didn't
like lead to a bunch of other synergistic businesses in Brazil.
Speaker 4 (53:19):
Right.
Speaker 3 (53:19):
You'd think it would, because you know there's like, are
there certain component manufacturers that could then sell into others
exactly right, all these different things or engines that go
into a jet that can be modified for engines for results.
Speaker 2 (53:33):
So if you're doing it for nationalistic reasons, at least initially,
you would think that security would be a factor here.
That you wouldn't necessarily want to rely on imports for
some of those like vital components, and yet that seems
to be the case here.
Speaker 1 (53:49):
So I don't know.
Speaker 3 (53:51):
Yeah, no, I don't know. It's very interesting story, it is,
I think to you as you sort of there's like
it's a little unsatisfying, only in this sense that we
can't look to ember Air and say like, oh, that's
how it's done, because what you want is you want
to see like, oh, this is you know, I feel
like when we talk about East Asian manufacturing success stories,
(54:14):
that blueprint, at least on paper, looks a little bit clearer, right.
It's like, yeah, you do final assembly first, and then
you do this, and then you set a series.
Speaker 2 (54:22):
Of it's like a natural progression, and you set.
Speaker 3 (54:24):
These export targets, and then the companies that hit the
export targets are presumed to be making something good because
they've satisfied the export test, and then you give them more,
et cetera. But at least in Embraer's situation, there aren't
enough other examples of such a thing, although obviously the
export discipline was part of it, where you could say, okay,
(54:46):
now let's repeat this over and over again, but still
very fascinating.
Speaker 2 (54:50):
Absolutely, I'm glad we did it.
Speaker 3 (54:51):
I'm glad.
Speaker 2 (54:52):
I still have questions, so maybe this will become like
a multi part series.
Speaker 3 (54:57):
It also, I mean it is. The Houseman episode just
sort of looms in my mind. Yeah, the whole conversation
because it's like, oh, yeah, you did it once, why
can't you do more? Or why can't Mexico then do more?
Given the long standing existence of final assembly plans. I
don't know. I guess if it were easy, every country
would be rich by.
Speaker 2 (55:14):
Now you know what we should do?
Speaker 1 (55:16):
Joe.
Speaker 2 (55:16):
Yeah, every time we talk about that Ricardo Houseman episode,
I get that vision of like monkeys keeping from tree
to tree. We should write a children's song about economic development,
monkeys and industrial policy or something.
Speaker 3 (55:29):
I'm seeing a children's book.
Speaker 2 (55:31):
Ooh, a children's book.
Speaker 6 (55:32):
I like that.
Speaker 2 (55:33):
Okay, all right, let's leave it there.
Speaker 3 (55:35):
Let's leave it there.
Speaker 2 (55:36):
This has been another episode of the All Thoughts Podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (55:42):
I'm Joe Wisenthal. You can follow me at The Stalwart.
Follow Juan David Rojas. He's Rojas r Wan d Follow
Richard albu Lafia's firm Aerodynamic Advisory Aerodynamic ad Follow our
producers Carmen Rodriguez at Carmen armand dash Ol Bennett add
Dashbod and Kilbrooks at Kilbrooks. And thank you to our
(56:03):
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Go sign up. And if you'd like to talk about
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(56:44):
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Thanks for listening
Speaker 6 (57:05):
In in
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:19):
Hello and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Alloway and I'm Joe Wisenthal. Joe, this is it.
This is your long awaited embre Aer episode.
Speaker 3 (00:29):
We're finally doing it. There are certain episodes we talked
forever about doing that we never do. The Jones, the
d Oh No. We did do a Dredgi Act episode,
the Jones Act being the big one. The other one
is we've never done it.
Speaker 4 (00:43):
You know.
Speaker 2 (00:43):
The Dredge Act episode was like a shadow Jones Act episode.
Speaker 3 (00:46):
True because price We've never done an Onion Futures episode.
But at long last we are going to be talking
about Embraer.
Speaker 2 (00:54):
Yeah, and this is such an interesting company. I know
we brought it up a few times before. But the
thing about it is, when you think about aerospace and
the layout of that particular industry, you usually think Boeing
versus Airbus. And we've certainly talked recently about the competition
between those two companies. They are the two biggest airplane
(01:15):
manufacturers aerospace manufacturers. But there's a third one, Comac. Not
quite yet, there's a third one, and it is a
lot smaller than Boeing and Airbus, but the fact that
it exists at all is kind of phenomenal. I don't
think a lot of people would have expected that the
world's third biggest aircraft manufacturer is in Brazil.
Speaker 3 (01:39):
That's exactly right, because for one thing, a you never
hear about them. B Generally speaking, there are not many
Latin American successfully global advanced manufacturing companies period. There are
other big Latin American companies obviously, but not in manufacturing.
Speaker 2 (01:57):
Most of them have to do with agriculture or commodity.
Speaker 3 (02:01):
Yes, yes, it's a very unlikely story, the fact that
this company exists at all. And it's not just that
they exist, because the first time that they came up
on the show, it was in the context of a
conversation about the troubles of Boeing. They're really good, they're
really respected in very well regarded, very well regarded, they
make high quality products, they're in demand from carriers all
(02:24):
over the world. And so it's not just that it exists.
It's not just as from Latam at least in its niche.
It's considered to be one of the best in the world.
Speaker 2 (02:33):
Absolutely, and so I think it's a worthwhile subject to explore.
How did Embrer come into being, what is its product offering,
what is the appeal? You know, it's a global market,
how has it managed to make inroads there, and what,
if anything it says about industrial policy and current efforts
(02:53):
to develop technologically advanced industries.
Speaker 3 (02:57):
This is the key thing, because we talk a lot
about industrial policy right now, in part because the United
States and also to some extent Europe, we're in the
midst of this sort of industrial policy fever, and there's
this enthusiasm for spending money, and there's this enthusiasm for
reindustrializing and building up at least some capacity in certain
(03:21):
critical things, whether it's electric vehicles, whether it's batteries, whether
it's solar panels, whatever it is. So I think it's
important to sort of have an understanding of prior waves
of industrial policy, because all governments from time to time
want to build their own champions or want to be
less reliant on some other country that they import from,
(03:42):
and so it's really good to sort of get an
understanding of some of the success stories and what actually happened.
Speaker 2 (03:48):
Absolutely all right, So this is a special episode, which
means we have two guests to talk about this. We're
going to start with someone who's been on the podcast before.
Richard Abulafia is of course the managing director over at
Aerodynamic Advisory, and we're going to start with him. Richard,
thank you so much for coming back on all thoughts.
Speaker 5 (04:06):
Oh, it's a real pleasure. Thanks for having me on.
Speaker 2 (04:09):
So when I think about the landscape of aerospace, I
mostly think about Boeing an airbus, but of course there
is a third and it happens to be Embreyer.
Speaker 5 (04:21):
Yes, that's right, much smaller but very, very impressive and
deeply influential company of Embreyer.
Speaker 3 (04:31):
So what is this company? What do they make? And
when you say impressive, what do you mean by that?
Speaker 5 (04:36):
Well, the fact that they were created and were able
to deliver aircraft that the market wanted and have been
through multiple different incarnations over the years, a respected provider
of aircraft to both airlines, business aviation customers and even
military customers. It's pretty remarkable when you think about it,
(04:58):
given the very high barrier entry in this business.
Speaker 2 (05:02):
So one thing I always hear when we start talking
about Embreer and how did it manage to become the
third biggest airplane producer in the world. A lot of
people will bring up this idea of specialization or having
some sort of niche in the market, some sort of focus,
And for Mbreer, it's the business jet, right like, that's
(05:22):
kind of what they're known for. A lot of people
consider them the gold standard in smaller business or regional jets.
How did that specialization come to be?
Speaker 5 (05:33):
Well, you know, the real breakthrough was in scheduled air transport,
first with turboprop regional aircraft, then with regional jet regional aircraft.
After a couple of decades of doing that, they realized
that the business aviation industry was actually quite right for
them to enter, and indeed, the profit margins typically are
higher in the business jet industry. What they did was
(05:54):
basically a form of arbitrage. They recognized that the margins
they'd enjoy in business aircraft would be higher than regional
but maybe perhaps a little bit lower than the traditional
business jed companies like Cessna or Oker, Beachcraft or Bombardier.
So therefore, if they were aggressive about pricing, their margins
would go up, but they could still get into that
(06:16):
business aviation market. And to this day, business aviation has
been effectively constituted as the third leg of MBRERE. The
first original was sort of on the military side, then
the big breakthrough scheduled air transports, and now also business aviation.
Speaker 3 (06:31):
So you mentioned smaller regional commercial plans, So just to
be clear, they don't have like a big wide body
like Boeing and Airbus two.
Speaker 5 (06:41):
They don't really have a big wide body at all,
and they don't even have a proper narrow body unfortunately,
and the entire airline world would love them to develop
a traditional mainline narrow body at this point. As a
matter of fact, I think they're crying out for it
because Boeing is stumbling very badly as the second place.
The Airbus's doing great, but they've got backlogs that are
(07:02):
ten years long. So get wine. Eventually you'll get your jet.
People are crying for Embrayer to do something bigger than
the kind of large regional jets that they've been doing.
The one five E two series is kind of right
on that border between regional jet and mainline jet. But
you know, it can't do say transcn us or something
(07:23):
that a seven thirty seven Nax or an a three
to twenty Neo can do. Routinely, But boy, what airlines
love them to develop a new product that did that.
Speaker 2 (07:31):
How is it that a Brazilian company is in a
position where the world's aviation market or airlines are crying
out for it to develop a narrow body because in
some respects, you know, we have national aerospace companies in
other places. So the last time we had you on
the podcast, we talked about Comac for a little bit.
(07:52):
In Russia, there's Tupulev and I can't remember the other one.
I think it starts with an US. But those haven't
really broken out of their local markets in the way
that ember Air has. How have they managed to do that?
Speaker 5 (08:07):
Well, you've got to go back to that. I don't
want to say those great old days because they weren't great.
But everyone thought, gee, we should carbon factory in the
jungle and build our own cars, aircraft, computers, whatever else.
And so many people tried that. There were some truly
spectacular failures. In Latin America you had FMA and Argentina
and Air and Chile. In Indonesia you had IPT and
(08:30):
lots of people had that idea. The Japanese tried it,
lots of people, and the Chinese and Russians have been
sort of screwing around with it for some time. Also,
Ambrayer could have easily gone down that path of failure,
but a couple of things happened. One they hit paydirt
with a couple of key products, most notably the embreyor
one twenty, which was a turboprop transport that really proved
(08:53):
quite popular in North America back in the nineteen eighties.
And after that, rather than basically can on that government
owned government hobby shop that they had been on and
others had been on, they decided to privatize, and they
did that extremely successfully in the nineties. And then on
top of that, they continued that engineering driven culture. They
(09:14):
had a lot of their people who came from a
school that they and the government kind of co owned
that basically proved a terrific farm for engineers and executives
going into the airspace business. Ita, I believe, and this
culture has prevailed to this day despite privatization. They've managed
to come up with a very happy combination of government
(09:37):
driven industrial policy transformed into something that is sustainable and profitable.
Speaker 3 (09:43):
I'm going to ask a really big zoom out question
because I realize I'm very ignorant of this, and I like, Oh,
there's a big plane that's a wide body, and then
there's a less big plane that I called a narrowbody,
but maybe it's not technically a narrowbody. I realized I
actually don't know any of this. Perhaps there are some
listeners who are the same. Can you talk about actually
just define some of the key segments of the commercial
(10:06):
aviation business broadly, and then with EMBRA air in the
markets they compete in. What do we talk about in
terms of market share?
Speaker 5 (10:12):
Yeah, first of all, commercial jet transport, That of course
is airline travel, and that has three flavors. One is
a wide body, which is typically for intercontinental international routes,
and it's very simple. You get on board and they're
two aisles rather than one. Only Airbus and Boeing do those.
China would like to get into that. The only country
(10:33):
in the world outside the US that ever did its
own was the old Soviet Union. Europe only did it
by pooling their resources and creating Airbus. Then you've got
narrow bodies, which are basically for mainline jet operations, single
aisle in the middle, typically starting at about one hundred
and twenty hundred and thirty passengers and a minimum of
(10:55):
say three thousand autical miles or something like that. Then
you've got regional jets which look kind of like small
trunken narrow bodies that just don't have the rains. They
typically max out at maybe fifteen hundred nautical miles and
typically about one hundred and twenty people, so they're not
below and embrayor has produced either the very smallest narrow
bodies or the very biggest regional jets you can possibly
(11:17):
find it or create, and they've done incredibly well with them,
like wow, that's a really quality product. But they simply
don't satisfy the requirements for airlines that want to do
traditional mainline trans con routes with a sufficient number of sizes.
I think Southwest for example. You know, the smallest Southwest
plane is just slightly bigger and more capable than the
(11:38):
biggest Embraer aircraft. In terms of military you know, they
were originally created effectively, is to put it gently, a
kind of a hobby shop for the fascist Hunta in
Brazil circa you know, sixty seventy years ago. So they
did basic military self sufficiency sort of stuff. But they've
evolved and it produced some pretty impressive aircraft and right
(11:59):
now co producing grief Invider jets designed by SAB for
the Brazilian Air Force. Most impressively, they've created this remarkable
military transport, the Case three to ninety, which can also
do air to air refueling for the Brazilian Air Force
and for export customers. It's a remarkable creation typically for
(12:19):
Embra Air, designed on time and on budget, so that
just goes to show what they can do. And then
finally the third leg business aircraft, individual owners and operators,
fractional share providers, anybody who's catering to wealthy people and
wealthy companies that want their own form of private travel.
Speaker 2 (12:55):
Joe, I always like looking at the regional jets because
you've got some weird ones, and you've got some weird
branding choices too. So I remember I was on I
guess it must have been like Austrian Airlines, and it
was a Dash eight from de Haveland, so a little turboprop,
and on the engine they had written in cursive the
Sounds of Silence, and that was the branding for the engine.
(13:17):
And I remember sitting there about to take off, just
thinking like silence is not the thing you want to
hear when you're on a turbo prop soaring above the mountains.
Speaker 3 (13:27):
I get, yeah, a little macaw, maybe a little Yeah.
Speaker 2 (13:31):
There's also there's a kind of weird Bombardier. I don't
even know if this would count as a regional jet
because I think it's for military use, but it has
like this really weird nose. If you look it up,
it's like.
Speaker 5 (13:44):
The Yeah, the Bombardier cr Jason. Yeah, there's inverted to
various military uses. What's interesting is that Bombardier was originally
the third biggest airframer and they kind of mostly died.
They're now the world's only pure play publicly jet Prime.
Everything else has been sold off after they kind of
at the company on something that cost way too much,
(14:07):
so Embray Air was left with the keys to the kingdom.
In terms of market share, they've got one hundred percent
of the regional jet market, a great place to be,
and a perfectly respectable single digit percentage of the business
aircraft market.
Speaker 6 (14:20):
And they really have.
Speaker 3 (14:21):
They have one hundred percent in that regional So we're
talking about the US or where one hundred percent. That
sounds crazy.
Speaker 5 (14:28):
There's no one else competing with them in regional jets. Nominally,
the Chinese are building the AARJ twenty one for Chinese customers.
Not sure i'd count it, but if you did, you
know it would be ninety ten or whatever.
Speaker 2 (14:39):
That's crazy. So I remember, you just jogged my memory, Richard.
But when I was covering airlines in like circa two
thousand and eight, I remember writing Bombardier headlines all the time,
and then they just kind of like, yeah, it.
Speaker 3 (14:52):
Was something in like twenty fifteen. I remember when I
just joined Bloomberg and there was a bunch of stuff.
What happened with them? Because I remember, yeah, the headline
where they going to be saved or bought or bailed
out or something.
Speaker 5 (15:04):
Yeah, that's right, And basically they decided to make that
leap into narrow bodies. They developed or tried to develop,
something called the C series, which was exactly in that
low end Airbus and Boeing class, and they bit off
more than they could chew. They counted on the Canadian
government and the Quebec government provincial government bailing them out,
which to a certain extent worked, but boy, they just
(15:27):
kept needing money and it became a giant money pit,
and eventually they had to pay Airbus to take this
jet off their hands so they could say, oh, please,
let us at least, you know, salvage something from this
terrible experience. And now it's known as the Airbus A
two twenty is a good jet. But Bombardier was forced
to sell off everything, including its regional jet division, which
(15:49):
the Japanese bought to no purpose or end. And all
Bombardier does now is business jets. Thankfully, they do them
very well and it's a good company, but they ve
exy did everything else.
Speaker 2 (16:00):
So going back to the sort of nineteen seventies nineteen
sixties aspect of all of this, so you laid out
very clearly the idea that there were a lot of
different countries that had national champions in terms of aerospace companies.
Everyone's trying to make their own car or make their
own plane or whatever. And when I think about that time,
(16:21):
I think about protectionism for some of those industries as well.
And so I guess the thing I'm wondering is, how
did a company like mbreer get a foothold in the US.
Was there some sort of like deregulation or liberalization of
the market that allowed it to get in there.
Speaker 5 (16:39):
Yeah, this is absolutely a key thing to explore, and
it's something unique to the aircraft industry that you can't
really do autarchy. A lot of the theories of Latin
American and other emerging country developments revolved around autarchy, our
own demand, our own whatever. You can't do that with aircraft.
You just can't because seventy eighty percent of the value
(17:00):
of an aircraft is in extremely technical parts. You know,
you might be able to do your own aircraft. Good
luck doing your own turbine engine, or your own avionic
system or your own auxiliary power unit or whatever else.
That's all coming from somebody else. And they recognized that,
and they said, you know again, great management. They said, oh,
we have to be a systems integrator like Dell Computer. Okay,
(17:21):
And I think I think sometime in the early nineties
Jeffrey Sachs the economists the great observation. They're Brazil's greatest exporter.
They're also one of their biggest importers. They have to
that's the way it works.
Speaker 3 (17:33):
So one of the other striking things is they have
this dominant market share in specific categories. It's impressive, it's profitable,
which is you know, not always a given. It's also
very small from a market cap standpoint, It's just a
five billion dollar company. Boeing is one hundred and nine
billion dollar companies, So it could lose five billion dollars
in market cap on a random Monday with like a
(17:55):
bad headline. What is the constraint there? Is it not
really been optimized? These just not that big markets that
it's playing in, even if it has dominant share, Is
it not that profitable? Has it not been run? I mean,
arguably one of the challenges or one of the complaints
leveled at Boeing it's, you know, it's been run too
aggressively to make profits at the cost of reliable planes.
(18:18):
Is there a situation kind of the opposite where it's
been less sort of focused on creating shareholder value.
Speaker 5 (18:25):
You know, it's just really hard to break out of
their swim lanes. They developed a couple of business jets,
or of them to be exact, that are really great
business jets, but you have to have more than that
to achieve critical mass. Similarly, regional jets, you know, the
three buckets and scheduled air transport. Regional jets are like
(18:46):
maybe five percent of the whole business, so it's really
tough to break out of that. And of course they're
military share. Well, the military market's unbelievably fragmented, so no
matter how good you are, you're not going to build
an F thirty five fighter jet. You're going to get
have a tiny, tiny share. So they're very well run.
They tend to be a bit conservative, that is true,
and here we are today where all the world's airlines
(19:09):
love them and trust them and want them to develop
a jet that would compete with Airbus and Boeing. But
it's really tough to make that leap.
Speaker 2 (19:17):
Why the reticence, Yeah.
Speaker 5 (19:19):
Well, give you an idea. You know, when Marty a
bet the company on that C series I mentioned before,
they were a twenty billion dollars a year company. So
imagine if you're a five or six billion dollar company
and you're asked to make that giant investment in a
narrow body aircraft. You'd better have some very deep pocketed
partners helping you to do that, and maybe they'll line
(19:40):
those up. But the idea of doing it on their own,
that's like asking one of us to go and win
the Nobel Prize in physics it's just a big just
really hard.
Speaker 2 (19:50):
How much synergy is there between building a regional jet
versus like the next level up a narrow body, Like
is it just a matter of you know, taking all
the components and spreading a model, Yeah, increasing them by
twenty percent or something like that. Or what's actually the
difference in terms of engineering.
Speaker 5 (20:09):
Yeah, that's a great question. It's really financial bandwidth in
terms of skill set very similar. Good program management and
great connections between the people at the top. This is
what's gone wrong at Bowing, the connections between the people
at the top and the people engaged in the company's
core business of designing and building planes. It's gone horribly wrong.
And dembrare No, they're pretty darn good. So good program management,
(20:33):
good company management, good systems engineering, good systems integration. They're
great at all of us. The case three ninety most
effectively illustrates that new military transport. What we're just talking
about is that as you get bigger in size class,
oh boy, their requirement for cash bros exponentially, so that
(20:53):
C series total spend at the end of the day
about seven billion dollars maybe eight billion in today's money.
You know, back then four or five almost broke the
company really really hard to get, and that was something
that was smaller that I think that Embryer would like
to do. Embryer, I think would love to do a
one hundred and eighty or two hundred feet jed. They're
(21:15):
going to need something on the order of eleven twelve
billion dollars in today's money, and that's just not going
to come from a five billion dollar a year in
revenue company.
Speaker 3 (21:25):
I'm sort of realizing, Tracy, because you know, my first
question is like, oh, what's so impressive about this company,
And the answer is the fact that they can make
airplanes at all consistently puts them into such a narrow
company that almost by definition, it is impressive. Do you
think at some point they will or is it just
they will try to like level up to another scale
and compete in a new market, or is that risk
(21:48):
of just sort of betting the whole house on a
new thing and not being able to sure you can
do it just like too inherently risky for a company.
Speaker 5 (21:55):
Besides, yeah, they just aren't going to do it on
their own. It's just physically not possible. Again, for the
same reason, I won't get that Nuclear Physics Prize any times.
In However, what is sort of intriguing is there are
game changers out there. You've got these very large US
defense primes that might be looking to diversify into adjacencies,
(22:15):
and some of them are assistance providers too, like an
RTX or a GE or you know, even a North
of Crumen. On the on the pure point defense side,
maybe someone say, hey, this is an intriguing possibility. But
then even more intriguing, you've got these economies in the
Arab Gulf, Saudi Arabia and the UA looking to diversify
with vast oil revenue. Maybe they could work with Embreyer
(22:39):
and say, hey, this is intriguing. Now. The problem is,
of course, you know what's in it for them. How
do you have this great culture of engineering in Brazil
and somehow migrate that to reodd or something that's really
super tricky. In the track record of aircraft companies working
with people who have money and want to get into it,
it's not a great track record. Taiwan and McDonald douglas
(23:01):
tried that three decades ago. Didn't go so good. But
you can't rule it out and the amount of money
that's slashing around in the oil states. Is it wouldn't
even move the needle. If they were to say, here's
twelve billion, let's build a jet. You wouldn't even show
up and it wouldn't even show up in their balance sheet.
It's walking around money.
Speaker 2 (23:20):
Maybe soft Bank can give them like fifty billion or something.
Why not be better then going into like some new
SaaS company. Okay, I have just one more question, and
this is something that I read a number of times
when I was researching what makes Embraer special and people
kept saying it's also ease of the mechanics. So the
(23:43):
idea that it can be fixed up pretty quickly and
pretty simply, and that's probably important if it's a smaller
jet that's going into smaller airports or more far flung
locations where resources are more limited. And I guess my
question is a is that true? And then be how
do you achieve that? Because my assumption would have been
(24:03):
that every aerospace manufacturer in the world would be trying
to create a problem free aircraft that doesn't need a
lot of work on it.
Speaker 3 (24:11):
And I'll just add a quick c onto Tracy's question.
But do the constraints of having to operate in a
country like Brazil or regional areas like that, do they
have a forcing effect on achieving that result of simplicity
and ease of prioritizing things like ease of repair, stuff
like that.
Speaker 5 (24:30):
Will you go back to the origins of the company,
when they were designing planes like the embryor one ten
Bandirante and other planes. You know it's agricultural aircraft. They
were all too mindful of the rather difficult operating circumstances
of a developing country like Brazil back then, and they've
had that mindset ever since. Now, our regional jets, remember,
our business jets, remember, are more maintainable than others. Not really,
(24:55):
but what they have gotten as a consequence of that
experience is an awareness of the important a good product support.
And it takes that background, that experience to realize that.
Like right now, you know, you've got everyone talking about
COMAC and China. Yes, excuse me, you need a worldwide
global support infrastructure before we even talk about exports, and
(25:17):
they're like, we need what now? And that is one
of the very biggest barriers to entry. And because of
embraer As origins, recognizing the importance of maintainability. They've always
emphasized that, they've always been really good about it. So
since World War Two, there's exactly been one country and
(25:37):
one company that has successfully entered the industry of building
commercial airliners, and that's Embray Air. That's incredible. Maybe the
Chinese are almost there, maybe we don't quite know. They
certainly haven't done so on an export basis the way
Embrey Air has. But in the historical context of everyone
trying to get into this industry and everybody failing, Embraer
(26:00):
stands out as a remarkable success story.
Speaker 3 (26:04):
Richard, thank you so much for coming back on the show.
That was fantastic.
Speaker 5 (26:08):
No, it's my pleasure, thank you.
Speaker 3 (26:24):
That was our conversation with Richard Abu Lafi about the
extraordinary success of embra Airbud. We want to understand more
about where this company came from and the sort of
political and economic environment in Brazil out from which it emerged.
So we're going to be speaking with Juan David Rojas.
He is a calumnist on Latam issues at Compact Magazine
(26:45):
as well as a contributor to American Affairs. So Wan,
thank you so much for coming on the podcast.
Speaker 6 (26:51):
Thanks for having me on big fan of the show.
Speaker 3 (26:53):
Thank you so much. So we had the conversation with Richard,
we sort of got a rough outline of the history
of embra a is founded in Brazil in nineteen sixty nine,
what was going on in Brazil economically or politically, and
maybe perhaps even across Latam such that the country felt
(27:14):
it necessary to have some sort of homegrown aviation company.
Speaker 4 (27:19):
So between the nineteen thirties and the nineteen eighties or so,
in Brazil and across most of Latin America, but in Brazil,
starting with the government of Jiduliu Ovodagas, you had consecutive
administrations from across the ideological spectrum, both democratic and authoritarian.
Speaker 6 (27:35):
Marcus is actually a great figure to look into there.
Speaker 4 (27:37):
But it promoted what were called ISI policies, import substitution, industrialization,
and in a nutshell, what that means is they used
protectionist measures, tear subsidies alike to both block the import
of industrial goods and foster the development of those same
products domestically. And this is actually what we've seen Brazil
do just weeks ago, along with a number of other
(27:59):
countries Mexico, the EU US raising tariffs against Chinese evs
and solar panels. So the idea is that, you know,
we want to develop our own EV industry. We can't
compete with China as such right now. We don't want
to import their goods. Now in Latin America is SI
policies get a bit of a bad rap with some
good reason, but they really shouldn't. Why today in Brazil,
(28:23):
of its twenty largest companies, half either were now or
at one point worse they don't. These are you know, Petrobras, Volley, CSN,
electro Bras, and of course Embiety. In each of these cases,
it took decades and loads of failures before any of
these companies became profitable. That's just industrial policy, one on one.
Depending on the industry in question, there's learning curves where
(28:46):
failure necessarily contributes to long term success. And what's said
is that around the time that Embiet was created, right
in the middle of the ISI period, Brazil was something
of an industrial powerhouse in the.
Speaker 6 (28:59):
Region, specifically in auto manufacturing.
Speaker 4 (29:02):
Again, a lot of these companies weren't necessarily profitable and
there were ambiguous failures which as in like nuclear power
and computers in Brazil, for example, but they were high
value sectors that contributed to huge gains both in productivity
and GDP growth. For perspective, average GDP growth in Brazil
during the ISI period was around five percent a year,
(29:23):
and since the eighties nineties it's been around two percent,
with productivity being stagnant.
Speaker 6 (29:28):
And you know, this makes a.
Speaker 4 (29:29):
Lot of sense because what we've seen since the nineties
is that Brazil's economy has really transitioned towards mining and
agriculture versus manufacturing, which manufacturing inherently is more beneficial towards
productivity growth.
Speaker 6 (29:43):
You know, starting in the.
Speaker 4 (29:44):
Nineties, industrial policy became kind of a bio word for
cronyism and an efficiency, and you haven't really seen efforts
in Brazil to develop high value sectors and new industries
where economies of scale are important, like aviation of the
companies I mentioned. You know, this makes sense. What were
these you know, Petrobrass, Pally, et cetera. They're all in
minding hydrocarbons. Ironically, still thanks to past industrial policy, which
(30:09):
isn't to say that privatization some of these cases was useful,
but Ambia it really is the outlier here and that
it's an aviation manufacturing.
Speaker 2 (30:17):
From So can I ask you to dive a little
bit more into the political atmosphere when Embrer was created,
because my understanding is that, okay, it had some roots
in the nineteen forties and the nineteen fifties, but it
wasn't until nineteen sixty nine, as Joe mentioned, that it
was really crystallized into a company. And of course, Brazil
(30:40):
in nineteen sixty nine was undergoing a lot of political change,
and sometimes when people talk about industrial policy, there is
an implication or a connotation that in order to have
very fast industrial development sometimes you need a command economy
or a dictatorship of some sort, and that was sort
(31:00):
of my understanding is that was kind of the background
in nineteen sixty nine.
Speaker 4 (31:05):
Yeah, that's exactly right. It's a really interesting point. There
was a twenty year military dictatorship in Brazil. Took power
in nineteen sixty four, left power in nineteen eighty five.
They actually created Embrae because in the decades up to
that point, the past governments tried to promote aviation solely
in the private sector and it.
Speaker 6 (31:25):
Didn't really work.
Speaker 4 (31:26):
Actually, interestingly, from the beginning, MBRAAD was a mixed private
public enterprise with the government holding only a fifty one
percent stake. And Brazil's military dictatorship was also interesting in that,
unlike Pinochet's dictatorship, were the last military dictatorship in Argentina,
they had more of a developmentalist but whereas you know,
(31:46):
the ideas of the Chicago Boys were more prominent in
Argentina during the seventies and eighties and Chile as well.
But importantly with mbraet and Aviation, as Brazil, there was
a concerted and consistent and effort over decades to really
develop the company and aviation. Richard mentioned the CTA, and
I want to say a little bit on that they
(32:08):
did this right and that they laid the groundwork through
the CTA and all THEA in the translation it's like
Technical Aerospace Center and it was modeled after Yeah, they
was modeled after MIT. They actually brought an MIT professor,
Richard Smith, and they developed all of these research institutes
(32:29):
that would focus on developing different designs for different planes
and the like. It actually produced one of EMBI had's
founders and longtime CEO, z D Silva. And this is
a guy, yeah, I want to mention because he's just incredible.
He was both a pilot and an aerospace engineer. He
actually worked on the prototype for the Bunday Nunchi, which
(32:51):
was EMBI had flagship program since its inception.
Speaker 6 (32:55):
Actually funny story.
Speaker 4 (32:56):
He left after like eighty six and then came back
once the company was privatized. But he was flying a
Shinghu which was actually a jet that unfortunately failed. But
he was on his way back from Brazilia with President
Samne to Sojous campus and he reportedly was one of
(33:19):
the first people to see Brazil's nineteen eighty six UFO incident.
There were like twenty like flashing lights all around so
Jose campus and it's famous in UFO lore.
Speaker 6 (33:30):
But it's just kind of funny. He was one of
the first people to see it.
Speaker 3 (33:33):
I'd never heard the nineteen eighty six Brazilian UFO incident.
May nineteen eighties series of radar and visual contexts.
Speaker 2 (33:40):
This is going to establish a new precedent of all
all thoughts. Guests must come prepared with one piece of
uf UFO r Yes.
Speaker 3 (33:49):
Wow, it's crazy. Yeah, it really happened. Huh okay, I'm
a believe that. Just to stay on the politics, the
military dictatorships are not that uncommon from time to time
around the world, particularly not that uncommon at various times
in the twentieth century in Latin America. But I hadn't
really thought about that that you do get sort of
(34:10):
different flavors of them from an ideological perspective. So it's interesting,
as you say, Chile sort of famously bringing in people
to give advice from the University of Chicago. Somewhat infamously,
I suppose, but it's interesting as you see your point,
maybe you can expand on that that the Brazilian one
had a very different attitude towards domestic economic development.
Speaker 6 (34:32):
Yeah, you know, I'll step back a second.
Speaker 4 (34:34):
If we think about all the countries in Latin America
where a company like embiad would really succeed, it makes
a lot of sense that Brazil would be it. It's
a massive country with multiple major cities far apart, making
aviation critical for both national security and commercial purposes. On
the latter that benefits from economies of scale. We're given
(34:55):
that Brazil has a large domestic market. There's a lot
of mo parts here, but really the intermingling, and you
could say this about a lot of other similar companies
around the world. The intermingling between the military and commercial
divisions of the company, particularly in Biet's case where exports
became prominent, was critical. You know, you think about it,
(35:17):
you need the military as a source of stable demand,
given that business cycles and aviation can be really volatile
and revenue tends to be limited, especially in a country
like Brazil. On the other hand, the potential for waste
as a monopoly or oligopolistic firm, depending on the state
military lends itself to the classic problem of protectionism. At
(35:39):
one point, the military insisted that all public sector planes
had to be purchased from MBIET and that all travels
should take place on those planes. And crucially, after sixty four,
the US imposed restrictions on military aid and weapons sales
in a similar way now to Russia, to force them
to rely on their own domestic industry. But the way
(36:00):
you mitigate that potential for croniism and the like is
by gearing your commercial operation towards exports and foreign markets,
particularly if you can find a niche, which is something
you guys.
Speaker 6 (36:10):
Talk with Richard about.
Speaker 2 (36:12):
I hadn't realized that, but it actually it makes a
lot of sense. The idea that Brazil is a very
large country with a lot of remote areas, and so
it really needs aircraft in many ways. But I guess
one thing I'm kind of curious about is when Brazil
was developing Emberer, what was the argument for comparative advantage
(36:34):
if there was one, Like, was there a moment in
time when people said, like, Okay, we need aircraft and
we can develop them in house. And lots of countries
are developing their own national aerospace companies at that time,
But was there a moment where they said and will
be better at it than other people.
Speaker 4 (36:53):
That's a really interesting question, and it goes back to
that point on finding the correct niche. It's important to
keep in mind that Mbiada came onto the scene very
late in the history of aviation. At this point, Argentina's FMA,
for example, was way ahead of MBI had to say
nothing of peers and developed countries. Very astutely, the leadership
(37:14):
of the company looked at the global landscape and said,
you know what, there's no way we can compete with
what's coming out of Europe. In the US, is there
a place where we can specialize and so lo and
behold By the early seventies, they.
Speaker 6 (37:26):
Produced the Ipanima and Shamanchi.
Speaker 4 (37:29):
The first one was a small agricultural spray plane and
the second a small jet fighter that was designed by
one of the CTA's research institutes. Then in seventy three
they unveiled the bund Nuncia, a nineteen seat turboprop plane
with around five hundred models sold mostly to the Brazilian military.
(37:51):
And almost immediately after this the firm made this strategic
decision of orienting itself towards exports and engaging with partnerships
with foreign peers. When you talk about like developmentalism in
Latin America, you often see the region compared to the
Asian tigers, where the explanation will be the ISI policies
worked in you know, like Taiwan, South Korea, et cetera,
(38:14):
because they geared their industries towards explorts rather than just
the internal market, which was more prominent in most Latin
American countries and with most firms.
Speaker 3 (38:25):
So you mentioned that by the time Embrer came into existence,
Argentina already had an aviation company FMA, which I'm just
looking at Wikipedia right now apparently was founded in nineteen
twenty seven, which seems but maybe.
Speaker 6 (38:40):
Yeah, yeah, right around the time. Actually, so what happened?
Speaker 3 (38:43):
Can you maybe give us the short compare and contrast
version of why regional carriers in the US are not
flying on little planes made by FMA.
Speaker 6 (38:54):
There's a lot more history than you know.
Speaker 4 (38:56):
Embrad went through a lot and saw are of failures,
but you know, you compare it to FMA and it's
just night and day. Why And it's sad because the
FM had that advantage they started so many decades earlier.
Speaker 6 (39:12):
And this is to give you an idea.
Speaker 4 (39:13):
It was first created I think in twenty seven by
secret decree and as a result of you can believe this,
there are no audits or financial records from the Argentine government.
And you know, another factor that's important too is the
fact that Brazil, you know, they had this twenty year
military dictatorship, but comparatively, there was a lot more stability.
(39:36):
That military dictatorship lasted a lot longer, and there was
continuity between these dictatorial and democratic governments. In Argentina during
the twentieth century, there were like I think something like
thirty something coups, and they had this effort during and
after the Second World War in Argentina. You know, bet
(39:57):
On famously took in a lot of Germans from Nazi
Germany and apparently.
Speaker 6 (40:04):
They didn't jive well with the Argentines.
Speaker 4 (40:07):
I have a few good data points on here that
in just five years fifty five and sixty they went
through nine different directors with a maximum term of twenty
three months, and it was just extremely volatile.
Speaker 6 (40:20):
It was just a complete disaster.
Speaker 4 (40:22):
And then, but I add the difference was that they
really specialized in going after these small and later regional jets.
Speaker 6 (40:30):
That then the regional ones took off in.
Speaker 4 (40:33):
The nineties after the company privatized, and they ended up
privatizing FMA also in the nineties, and that was a
complete disaster. Is run by Lockheed and they promised to
like not layoff with some of the workers and made
other promises, broke all of them. But the Argentine states
still look the other way.
Speaker 2 (41:07):
Going back to mbreer, can you talk to us about
I guess its role in the overall Brazilian economy, because
this is something I was thinking about. We did that
episode with Ricardo Houseman where he was talking about.
Speaker 3 (41:20):
That episode is very much in the background of my mind.
Speaker 2 (41:23):
Yeah, and he was talking about, you know this idea
that once a country develops one industry, it sort of
leads to other industries where there are synergies or where
that technological knowledge can be built upon. So I'm curious, like,
were there other trees that Mbreer actually led to within
(41:44):
the Brazilian economy.
Speaker 4 (41:46):
The military industrial sector had a number of different firms
and actually, when that comes to mind right now, unfortunately
because it runs the risk of being acquired by a
foreign company, AVI Bras, which specialized and make a number
of military hardware, and the CTA it was based out of,
(42:06):
so Jouzebu's comp was in the state of sal Pablo
is kind of known as Brazil's silicon valley, and that
actually turned into this huge industrial hub. I believe Lula
actually worked out of there when he was a union
leader for the Brazil's Metallurgy Union. And I had as
a pretty small company. It's worth only about what like
(42:28):
five billion dollars. And unfortunately, what we saw after the
nineties is that a lot of Brazil's industry in manufacturing
really collapsed because of the fact that they liberalized trade
and privatized a lot of these companies. Some of them
did better, like Petrobras and Voley, for instance, but a
lot of the indigenous auto manufacturing firms basically collapsed overnight, unfortunately.
Speaker 3 (42:54):
So this touches on a couple of things what I
was going to ask next, But in your view, I mean,
the whole reason we're interested in Amber Air in the
first place is because two things, right. The first is
it's really hard to make a plane, period, and we
see that in the US, and we see that in China,
and I guess Europe seems to be doing fine with
(43:16):
making planes at Airbus, but objectively speaking, building a reliable
commercial plane is really difficult, so that's very unlikely. And
then b there are just not many advanced manufacturing success
stories in Latin America period, which sort of touches on
the question that Tracy just asked about. So part of
the question here is like what happened such that A Like,
(43:39):
how is there this one company that managed to overcome
two very unlikely things happening? And b is it just
a matter of premature liberalization? And your viewer like, what
are the factors that cause that there aren't more Embra airrors?
You know, why isn't there a Brazilian byd or whatever
it is.
Speaker 6 (43:57):
As far as why am but I had succeeded, a
lot of it is luck.
Speaker 4 (44:00):
A lot of it is just smart investments, really good
competence and cultivating talent for this company. But as far
as why there isn't a Brazilian bid, you know, there's
this automaker in Brazil, Bouguel. Its president was known as
the Brazilian Henry Ford. And to be honest, most of
(44:21):
the cars that this company made weren't great, but a
lot of them had potential.
Speaker 6 (44:25):
They were actually.
Speaker 4 (44:26):
Making evs during the seventies and eighties. They were these
small little cars, and the jeeps that they made were
pretty good. Unfortunately, after they removed tariffs and allowed competition
with imports in the nineties, the company went bankrupt in
nineteen ninety six.
Speaker 6 (44:43):
And we talk about premature liberalization.
Speaker 4 (44:47):
It's interesting because what I would argue with the company
like that is that you don't want to just prop
up these companies unnecessarily, especially if they're not giving results.
But if there's potential there, things maybe would have been different. If,
let's say, policymakers have said, you know what, we don't
want you to fail, but we want to see results,
you need to gear your operation towards exports, and we're
(45:09):
going to condition a lot of our support on increasing production,
et cetera.
Speaker 2 (45:13):
What's the new industrial policy in Brazil? I keep hearing
about that, and I guess the big question is when
you say new industrial policy, how does that differ from
the old industrial policy?
Speaker 4 (45:25):
Lula, I believe it was earlier this year unveiled what
he called his new Industrial Plan. I think it is
where I forget exactly the figure, including you know, a
bunch of subsidies, local content requirements, credit lines in order
to attract investments, specifically in manufacturing. And actually the results
so far are pretty good. The landis buyd great Wall Motors.
(45:50):
A number of key firms have opened up plants in
Brazil and the idea is to be able to benefit
from that technology transfer.
Speaker 6 (45:59):
And it's you know, it's just it's one thing just.
Speaker 4 (46:01):
If foreign multinationals are opening up plants in your country.
Another is that you can really actually learn from them
and then create your own firms.
Speaker 3 (46:11):
There's been plants in Mexico for a long time, US
automaker plants, but Mexico does not have as far as
I know, a rising domestic auto industry of its own.
What are the barriers? Why is it that in some
cases it's in theory that works. You have some foreign
automakers like Ford set up a plant, and then there's
no how, and then there's domestic building and there's rising
(46:31):
the value chain, and then sometimes you're still just basically
capturing only a modest share of value as a place
for and finishing, and it doesn't spread out.
Speaker 4 (46:41):
Mexico is really today one of the few put countries
in Latin America that has a really robust manufacturing sector.
But as you stated, it's all really just assembly. They
just import inputs from abroad, assemble these finished goods and
send them to the US. And this is actually how
a lot of the Asian tigers started out Taiwan and Singapore,
(47:04):
et cetera. They started out assembling these goods and then
exporting them. But they eventually graduated such the point where
you know, they developed companies like Samsung, TSMC the like.
And exactly why that hasn't happened in Mexico, for instance,
in other Latin American countries, it's hard to say. I
(47:25):
think we could chalk it up to an extent to
a lack of imagination honestly.
Speaker 2 (47:31):
So on that note, I mean, I know your expertise
is Latin America, but do you think nowadays you could
have a repeat of an Embraer in the sense that
you could have, you know, a homegrown high tech industry
despite the idea that there are all these you know,
quite high barriers to entry, especially for something as complex
(47:53):
as building aircraft.
Speaker 4 (47:55):
That's a tough question because if it were to happen,
it would take deck and it would take decades for
us to see a firm that's really successful. I meant
to get into this, EMBI had was really in crisis
mode during much of the eighties and early nineties. Why
during the seventies, Brazil saw this huge boom upwards of
(48:18):
like ten percent growth each year, and they were investing
in all of these manufacturing companies, but a lot of
that was financed with external debt. You get to seventy nine,
I believe in mister Volker, and the Federal Reserve starts
massively raising interest rates. This causes a huge crisis in
Brazil that causes the country's debt to explode and similarly
(48:40):
affected a lot of other countries in Latin America. You
guys might have heard the term the last decade for
to the nineteen eighties. Interestingly, actually in Brazil up until
like eighty five, the military their view was that they
could pay down some of their debt by promoting exports,
and they ran these huge surflas. Since then after eighty
(49:02):
five they started more of an austerity regime. There was
also a slump in the early nineties because of the
golf War, but the company was given like a half
a billion dollar rescue package. But when it was finally privatized,
it actually had to be put up for auction like
five times because it was viewed as so undesirable.
Speaker 3 (49:21):
So that's interesting, the vulgar shock sort of clobbering the
economies of countries that had gone into debt to do
domestic investment. You mentioned the golf war downturn, which I
hadn't thought about. But after the military dictatorship ended after
twenty years and then the company went private, Like, what
(49:42):
was the sort of policy stance of the government at
that time. Was it a sort of sort of classic
Washington consensus pursue that kind of liberalism? Like what was
the environment the domestic policy environment during that sort of
those rough years in the eighties and nineties.
Speaker 6 (49:58):
You know, I think you I could say it's a
bit of both.
Speaker 4 (50:01):
The key thing is that when the company was privatized,
the government kept what's called the golden share, giving them,
you know, veto power over changes in ownership and really
strategic decisions with regards to.
Speaker 6 (50:14):
The running of the company.
Speaker 4 (50:15):
And it's really because of this golden share that the
company is still a Brazilian company. Avibas actually, which I
mentioned before, was completely privatized. The government kept zero ownership,
and it's because of that that it runs the risk
now of being sold off and no longer being Brazilian.
They had this pre privatization venture into I think it
(50:37):
was the erj that really took off after privatization. There's
all these interests in regional jets.
Speaker 6 (50:44):
But on the one hand, there was a more lase
a fair approach.
Speaker 4 (50:48):
But you know, because aviation manufacturers it is really necessary
to have support from the government.
Speaker 6 (50:55):
I mean, you know, Boeing and the like their government contractors.
Speaker 4 (51:00):
The support that I had received from the Brazilian state
was similar to its more developed peers.
Speaker 6 (51:06):
You know, they're still subsidized and the.
Speaker 3 (51:08):
Like one David Rojas, thank you so much for coming
out odd luck.
Speaker 6 (51:12):
That was great. Thanks to ton guys.
Speaker 3 (51:26):
Tracy. I'm really glad we finally did an EMBRA air episode.
I think my big takeaway is it's really hard to
make an airplane, and you also just need a lot
of luck.
Speaker 2 (51:37):
Yeah, it's funny you say that. I was about to
say the exact same thing, like there's a tendency to
think like, oh, they must have done all the right things,
or there's some sort of like insight that you can
pull out of this one specific example. But it seems
in some respects like, yeah, they got lucky. They made
some good decisions, they had some good management. I guess
(51:58):
the one thing that they did was identify that niche right.
And the other thing I was thinking about is actually
Quan hit upon it really well in that second part
where he was talking about how the geography of Brazil
kind of lent itself to the need for aircraft, and
I guess within that you would want lots of regional
or smaller jets because you're going to more remote locations
(52:21):
and probably not you know, big metropolitan centers all the time,
and so in some respects it kind of lent itself
to that regional jet or business jet idea totally.
Speaker 3 (52:31):
It dovetails with the point Richard made to that one
of the preconditions for establishing any sort of aviation company
at scale is that really excellent customer support or customer
service network. And so you think, like, well, one reason
why Brazil and not any other country in Latin America
is just by luck, I guess, the sheer size and
(52:53):
the sheer necessity of having to build out all that
stuff at scale just to even serve the domestic market.
Speaker 2 (53:00):
Absolutely. The other thing that I think is interesting is
that idea of like synergistic economic development. And I guess
we shouldn't make this a three parter, but maybe we
need to get Houseman on to explain why Amber didn't
like lead to a bunch of other synergistic businesses in Brazil.
Speaker 4 (53:19):
Right.
Speaker 3 (53:19):
You'd think it would, because you know there's like, are
there certain component manufacturers that could then sell into others
exactly right, all these different things or engines that go
into a jet that can be modified for engines for results.
Speaker 2 (53:33):
So if you're doing it for nationalistic reasons, at least initially,
you would think that security would be a factor here.
That you wouldn't necessarily want to rely on imports for
some of those like vital components, and yet that seems
to be the case here.
Speaker 1 (53:49):
So I don't know.
Speaker 3 (53:51):
Yeah, no, I don't know. It's very interesting story, it is,
I think to you as you sort of there's like
it's a little unsatisfying, only in this sense that we
can't look to ember Air and say like, oh, that's
how it's done, because what you want is you want
to see like, oh, this is you know, I feel
like when we talk about East Asian manufacturing success stories,
(54:14):
that blueprint, at least on paper, looks a little bit clearer, right.
It's like, yeah, you do final assembly first, and then
you do this, and then you set a series.
Speaker 2 (54:22):
Of it's like a natural progression, and you set.
Speaker 3 (54:24):
These export targets, and then the companies that hit the
export targets are presumed to be making something good because
they've satisfied the export test, and then you give them more,
et cetera. But at least in Embraer's situation, there aren't
enough other examples of such a thing, although obviously the
export discipline was part of it, where you could say, okay,
(54:46):
now let's repeat this over and over again, but still
very fascinating.
Speaker 2 (54:50):
Absolutely, I'm glad we did it.
Speaker 3 (54:51):
I'm glad.
Speaker 2 (54:52):
I still have questions, so maybe this will become like
a multi part series.
Speaker 3 (54:57):
It also, I mean it is. The Houseman episode just
sort of looms in my mind. Yeah, the whole conversation
because it's like, oh, yeah, you did it once, why
can't you do more? Or why can't Mexico then do more?
Given the long standing existence of final assembly plans. I
don't know. I guess if it were easy, every country
would be rich by.
Speaker 2 (55:14):
Now you know what we should do?
Speaker 1 (55:16):
Joe.
Speaker 2 (55:16):
Yeah, every time we talk about that Ricardo Houseman episode,
I get that vision of like monkeys keeping from tree
to tree. We should write a children's song about economic development,
monkeys and industrial policy or something.
Speaker 3 (55:29):
I'm seeing a children's book.
Speaker 2 (55:31):
Ooh, a children's book.
Speaker 6 (55:32):
I like that.
Speaker 2 (55:33):
Okay, all right, let's leave it there.
Speaker 3 (55:35):
Let's leave it there.
Speaker 2 (55:36):
This has been another episode of the All Thoughts Podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (55:42):
I'm Joe Wisenthal. You can follow me at The Stalwart.
Follow Juan David Rojas. He's Rojas r Wan d Follow
Richard albu Lafia's firm Aerodynamic Advisory Aerodynamic ad Follow our
producers Carmen Rodriguez at Carmen armand dash Ol Bennett add
Dashbod and Kilbrooks at Kilbrooks. And thank you to our
(56:03):
producer Moses Ondam. For more Oddlots content, go to Bloomberg
dot com slash odd Lots, where of transcripts, a blog,
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Go sign up. And if you'd like to talk about
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Speaker 2 (56:21):
And if you enjoy odd Lots, if you like it
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Thanks for listening
Speaker 6 (57:05):
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