Tuesday, May 4, 2010


[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

After World War II, Brazil decided to implement a strategic national aircraft manufacturing project. In 1969, the Empresa Brasileria de Aeronautica (Embraer) was established for the manufacturing of two of Brazil’s first prototypes. In 1994, Embraer was privatized merging its technological and industrial capabilities with an entrepreneurial drive. Today, Embraer is the largest manufacturing exporter (3rd or 4th largest exporter in general) in Brazil.
They focus on their 5 pillars – High tech, qualified people, global presence, cash intensiveness and flexibility. Because of the exceptionally technological nature of aircraft design and manufacturing, they hire a large number of Ph.D (2%) and post-graduates (4%) in various technical fields. With the PPP and associated salaries, they tend to hire engineers locally, many coming from Brazilian universities such as ITA (founded in 1950, which has a graduating class of between 120 to 150 students per year going into various fields). Embraer’s engineers are coveted around the world for their proficiency and technical skills.
They also support the local community through education, opening a high school in 2002 with a technical and engineering focus which now boasts being the top school in Sao Paulo (competing with local private schools) with 80% of their students excelling in the college entrance exams (100% matriculation rate).
Embraer has a variety of different aircraft, the most unique being the Ipanema, the first certified and serialized 100% biofuel aircraft (apparently used for crop dusting). The development for their commercial aircraft is usually between 4 to 5 years with a 10 year product life cycle and their Embraer 170 to 195 series (70 to 122 seaters for midsize commercial use) share 80% common parts which allows airlines to maintain smaller inventories of spare parts and reduce the training required (the 170 and 175 pair and the 190 and 195 pair share wings and engines between pairs, 95% commonality, and the series has otherwise identical fuselages which are scaled for size).
Since Privatization Embraer has been trading on the NYSE (53%) and Bovespa (47%), but the government still holds a “golden share” which restricts some of Embraer’s actions (the 6 positions: No acquisition by foreign investors, approval of change in logo, and 4 rules relating to defense contracts).
When asked what was their biggest input cost exposure, our host explained the idea of currency fluctuation in the value of the Brazilian Real versus international currencies (which reminded all the first years of our recent GMP exam – a case study of the international manufacture and sales of airplanes).
They also identified to us the mechanics of their revenue streams:
Example. Assume a client (a major commercial airline) is thinking about to buying around 14 aircraft. They might make a firm order for 10 planes, but retain options to buy 8 more (using the same financial terms) if they decide they want more capacity. Embraer recognizes that historically, 50% of all options materialize (become orders) and has currently delivered 3 of the planes to the client.
What mechanics are involved in understanding their sales as well as their operations?
Maximum Sales = Firm Order + Options = 10 + 8 = 18
Firm Backlog = Firm Order – Deliveries = 10 – 3 = 7
Expected Sales = Firm Order + Options * P(Option materializes) = 10 + 8 * 50% = 14
Expected backlog = Expected Sales – Deliveries = 14 – 3 = 11
There are implications for managing and maintaining a consistent backlog (guaranteed revenue streams). Also aircraft sales are considered to be a lagging indicator of the economy.

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