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