Apr. 3, 2013 - By AARON MEHTA - Defense News
In 2006, Embraer Defense & Security, Brazil’s largest defense company, earned $227 million in revenue. In 2012, it cleared $1 billion in revenue for the first time. That economic growth has mirrored the company’s emergence on the world stage, a presence the company is confident it can increase even as nations around the world cut defense spending.
With the U.S. Air Force selecting Embraer’s Super Tucano as the light air support (LAS) contract winner to supply Afghanistan with new turboprop combat planes, the company now has a foothold in America and eyes on worldwide expansion with its KC-390 transport plane. Defense News talked to company CEO Luiz Carlos Aguiar on March 14 as part of a company-sponsored trip to Brazil.
Q. You’ve talked about seeking out niche markets. How does the company target these and capitalize on them?
A. We have great experience doing that, not just on defense. On defense, we have a couple of examples, such as the [LAS contract]. When the Brazilian Air Force and Embraer designed these airplanes, it was designed for the Brazilian mission. Later, we found we had discovered a niche product for countries like Brazil that had challenges on their borders, trying to control the narco-traffic, drugs, arms and other things like that. The Philippines, Indonesia, even Central America, there is a great challenge to control the drugs there. The Brazilian Air Force had introduced a new aircraft, and later other air forces decided it was the right one to combat these kind of problems we have all over the world.
Another case is the patrol and surveillance aircraft based on the ERJ-145 [a civilian regional jet]. It’s a very cost-effective airplane. It is now being utilized by Mexico, by Greece, by India and others. It was again based on the Brazilian budget constraints.
Other countries have a lot of cuts and they need to have a surveillance system. For their missions, they don’t need to buy a larger airplane — they need something smaller. Once again, we found our niche for that.
Q. How is the KC-390 transport plane different from past products?
A. When we thought about this airplane, it was the first time we looked at the international market also, not just the Brazilian requirements. We balanced both needs. We saw the market first. We saw there were 2,000 old airplanes all over the world in more than 70 countries, very well spread out with a diversified base of potential customers. We looked at that and saw there was only one aircraft available in the market being produced and being delivered [the C-130].
We looked at the market and then came back to the Brazilian Air Force to talk with them about what they think about their cargo airplanes for the future. They said they were probably going to replace with more C-130s, and we started talking and showed them we were able to develop something in a very feasible way. It took two years working together to launch and sign the contract. It was a much more sophisticated process. We are on schedule, and I think we have a great chance to sell abroad.
Q. What other products do you have an eye on exporting?
A. When you look at the land side of it, we have the C4I capabilities with the company we just bought, Atech. We need to invest more money on that, we need to have more contracts to develop the technology, but there are capabilities already in place.
The radar company, Orbisat, once again has a chance in Brazil to produce and deliver [for Embraer’s border security system] Sisfron, and then we’ll have an economy of scale and a great chance to mature this product and export it also. We are focused on C4I, radars. And our bet is intelligence and communications.
Q. You’ve said you view the LAS contract as establishing the company in the American market. How do you expand?
A. We need to consolidate first and execute this program. We have a new company there, which is Embraer Defense & Security, incorporated in the U.S. We need to find someone who will manage it, a local, American executive to run this business for us. And then we’re going to write down a new business plan for America that, in my opinion, must include certain types of acquisitions. We need to think a little more about it.
First thing is getting there, executing this program [LAS], getting closer to increase our credibility with the end user. We are certain in this. But we want to take this opportunity to get to know our end user. We’re going to find and study the market.
Our main objective is two pillars: mobility and surveillance. These two operational capabilities are what we are focused on. Any type of acquisition, any type of project, will be under these two pillars.
We don’t want to go into armaments or other areas. Why? Because despite all of the budget constraints, these two areas need capabilities. Even in these specific areas, the budget in Europe or the U.S. might grow despite the fact the entire [defense] budget is shrinking.
Q. Are you worried about Beechcraft’s challenge to the LAS contract award?
A. No. The process was so robust. Senior people took control of the process. They have internal and external advisers. I think they did the right thing, they did it by the book, and they will prove that. It’s going to take some time, but I think this time we’re going to get there. We are ready to go right away in order to deliver on time, but we need to be patient and wait a little bit more, unfortunately.
Q. Could the Beechcraft challenge impact the timing of the contract?
A. I hope not. At this stage, it is very difficult to say something. [The U.S. Air Force] needs to [act] carefully so it does not open any gap in the process. That’s the way it is.
Unfortunately, our competitors are going downhill. They discontinued a lot of products that in the past were the champions of the market, and they tried to keep this as if it was their survival. They keep saying that they have the lower price. But mission capabilities, past performance and price, there are three variables and the [request for proposal] is quite clear on that. [USAF] took all of the information, put it inside their model, and then said who is the winner. That’s the way it is.
Q. Is Brazil’s long-delayed F-X fighter jet program coming soon, and what role will Embraer have?
A. I think Brazil is going to make this decision. It is time to make this decision. They have everything in place. All of the contenders have offered their offset programs. It’s more than mature enough to go ahead, in my opinion. I think it’s going to be in the next months, this year, I would say. Our role in that depends — I cannot tell any details — depends on who is going to win.
We have a memorandum of understanding with all three of the contenders. Each of them offers an offset program, but we prefer not declaring publicly our preference because we don’t want it to jeopardize the choice. It is a governmental decision, and we will respect that. Whatever they choose, we’re going to be in the process. They need to make this decision because Brazil needs that.
And it will have huge benefits for industry as well. There are new technologies, products and developments. There are opportunities for Embraer to leverage our current technology through the F-X. With the F-X, we can even go further in terms of technology, and even some new products could come up with one of these three contenders. That’s what I can tell you, I can’t go further than that.
Q. Did the decision to recompete the LAS competition hurt the chances of a U.S. company winning the F-X program?
A. There is no formal relation between the two programs. Formally. But goodwill is important. I couldn’t say that the [F/A-18 Super Hornet] is not going to be selected, but for sure, the way that [the initial LAS contract] happened in the United States — choosing a Brazilian aircraft, then canceling the contract, the way it happened — it caused some kind of bad blood, right? It’s a normal, human perception.
Q. But you don’t think there was long-term damage to the relationship between the two countries?
A. No, I don’t think so. Now, it is different. There are some steps that any competitor in the United States has the right to do. It doesn’t mean the [USAF] is canceling the contract; they are trying to keep our victory. One year ago, they looked at the process, saw some gaps, made a mistake and they canceled the contract. Now it’s different. They are trying to defend their choice. So far, so good. No problem at all with the relationship. It’s a part of the game there. That’s the way it is, there are rules and laws.
Q. What is next for Embraer?
A. We’re going to have a lot of new projects. And they are big. We’re talking about $20-25 billion in the next 10 years. If you look back, it started in 2008, when we had the new national defense strategy. After that, you had the mobility project with KC-390, the submarine project with the French company DCNS, the Sisfron.
In any society, you want to develop technology and protect yourself, because there are threats you didn’t have before. There are more things happening in Brazil right now, and we need to protect ourselves. There are high-level, added-value products we can develop and export. That’s our objective. We don’t see the maximum market as just selling in Brazil and continuing the process later. We try to focus where we can add value, build up a capability, and sell abroad. That’s the way it is.
• 2012 revenue: $1.06 billion
• 2012 backlog: $3.4 billion
• Key businesses: Aerospace, border security, ISR and integrated solutions.
• Key markets: Latin America, Africa, Asia-Pacific
Source: Defense News research
Mehta reported from San Jose Dos Campos, Brazil.
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