Embraer

[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.

Ethanol Fuel – Is Sustainable Fuel Socially Responsible?

In our Business Ethics class, I had done a presentation on the Ethics of Ethanol Fuel and now that I am in Brazil, the topic of ethanol fuel and its relationship to sugar cane and other staple food commodities has been emphasized. And even if global trade increases and creates wealth it does not make any guarantees with regards to how that wealth is distributed as explained by our GMP Prof. Blum.

I proposed this question: “Is it ethical for rich countries to drive cars if it causes poor countries to starve?”

This problem was exacerbated in the World Food crisis in 2007 and 2008, when oil prices hit all time highs and the arbitrage relationship between oil and food was exploited.

Here is the relationship:

1. The US and Brazil are the largest producers (89%) of ethanol fuel using corn and sugar cane (respectively).
2. When oil prices increase, people have a tendency to switch to ethanol based fuels.
3. When the demand for ethanol increases (as a substitute) the demand on the inputs for ethanol (corn, sugar cane, potatoes) also increases.
4. There are real arbitrage opportunities by hedgers, speculators and even farmers as they shift the use of arable land to produce more valuable crops. However, even with arbitrage there are limits as arable land is limited (to create more arable land, there is often deforestation which creates its own sustainability issues).
5. Also poor countries have a much higher sensitivity to fluctuations in the price of raw commodities whereas rich countries are insulated from food costs because they only represent a small percentage of the final costs (including value added costs such as manufacturing, distribution and retail costs). It’s the difference between eating a bowl of rice versus a bowl of Rice Krispies.

The consultants at Deloitte confirmed this relationship in very concrete terms using the Brazilian gas pumps as an example (where prices for ethanol based fuel versus gasoline are explicitly posted in the same way gas prices are at the pump). Currently, the cost of Ethanol fuel is 50% the price of gasoline (although it only provides 70% of the performance). However, in the “off season” when sugar cane is more expensive, it can even reach a price of 80% of gasoline (which is clearly not as cost effective). There is a direct relationship between the price of sugar cane and the price of ethanol fuel.

Deloitte Brazil

[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]

Deloitte is a well recognized name in the consulting world, operating in 140 countries. In Brazil, Deloitte made its entry in 1911 where they were asked to audit British railroad companies. Today, Deloitte has grown to 4000 professionals working with 132 partners. They have a multifunctional approach (versus a siloed approach) where they provide integrated solutions and command a leading 19% market share of audit services in Brazil followed by KPMG at 17% and PWC at 11%.

They structure their portfolio of advisory services based on industry verticals. In Canada, Deloitte is known to focus on public and financial services whereas in Brazil they focus on manufacturing, retail and the growing financial services sector. Their growth targets are projected to move from 10% to 20% across the board with the highest growth occurring in their consulting services at 25%.

Even with the recent global financial distress, like many other consulting and advisory service firms, they have shifted their focus in branches like their Corporate Finance advisory from M&A deals to restructuring distressed companies and managing them in receivership. According to our contacts at Deloitte, Brazilian banks have been exceptionally successful despite (or rather because of) the financial crisis in the US. The top banks in Brazil are local banks (rather than subsidiaries of foreign parents) and their international presence has allowed them to extend their services beyond retail banking into commercial banking and even IPO’s in global capital markets.

Also, with the upcoming convergence of IFRS (Brazil’s current standard) and US GAAP and Brazil’s increasing role in the global market place, they anticipate having a spike in engagements from clients looking for advice on the implications of the changes in accounting standards and their implications on the complicated tax systems in Brazil (greatly differing by state).
Deloitte is also heavily involved in projects like the World Coup 2014 and the Olympics in Rio where they are not only assisting with capacity management of the facilities for the event itself, but also the legacy planning for the facilities in the future after the event itself is finished (ensuring long term sustainability and viability of the project costs).

Deloitte also has a strong focus on social projects, celebrating their “Impact Day” on June 11, the day of the World Cup, where they have a series of planned activities matching their core of applying knowledge with the development of educational programs. All of their professionals will be volunteering throughout the country taking children to play football with star athletes and preparing creative activities throughout the day.

Because of Deloitte’s unique relationship with a variety of top companies (boasting a client list that includes 80% of the Global F500 companies), they have provided us with contacts for our study tour which we will be visiting over the next few days. They also gave us an insider’s view of details into the developments of sectors within the Brazilian economy including the development of the infrastructure (marking the return of their focus on railroads). They gave us an in depth look at why Brazil is such an attractive country with which to have a presence in the global market place and why they have earned their place among the BRIC countries as one of the top emerging markets.

Port de Santos

[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]

Chinese Feng Shui associates water with money, with its ebbs and flows representing the movement and acquisition of fortune and wealth. At first I had always thought this was a crazy superstition, but some of the most prosperous cities in the world are those that are located on waterways and at some point in their history benefited from trade with other cities (ex. New York, Montreal, Toronto, etc).

The Port of Santos is no exception. Operating along the Tiete-Parana waterway, the Port de Santos is the largest container port in Latin America (and 41st largest in the world). It dwarfs other Latin American ports, the next four largest ports having a combined capacity of about 24% (versus Port de Santos’ 25%) of Brazil’s total exports. Port de Santos acts as a gateway to Latin America, acting as a free port with rail access to Bolivia and road access to Paraguay moving dry bulk, liquid bulk and break bulk goods. Much of the development of industry in Sao Paulo and Cubatao can be attributed to the presence of the port and Brazil’s first hydro electric dam.

We were fortunate to have a boat ride along the waterway as a logistics consultant from Deloitte highlighted the presence of different companies and products being moved through the port. There were cranes towering over massive cargo freighters moving quantities of containers holding anything from sugar to wind farm turbine blades.

There are currently several investment projects underway to improve the infrastructure and information technology systems of the port with the most notable and ambitious being the expansion and dredging of the canal itself: Moving from a 12-14m depth and 150m width allowing 1 way traffic to having a 15m depth and 220m width allowing 2 way traffic, potentially increasing the capacity of cargo movement by 30%.

With the resource race between hungry countries like China, Brazil’s highly coveted natural resources make it a target for investment by foreign countries. While the port is owned and operated by Companhia Docas do Estado de Sao Paulo (CODESP), a government agency, the terminal and services are owned and operated by different companies.

Churrascaria – Nova Pampa

[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 our tour of the coffee plantation, we had lunch at the notorious Brazilian style steak house. These steak houses are the ones where you have a small badge on the table. If you want more meat, you leave it on the green “Sim, por favor” side. If you are stuffed, you switch it to the red “Nao, obrigado” side.


We were all excited and started scarfing down loads of sausage, steak, chicken and cheese stuffed cheese (not a typo).
Even when some of us decided to get some vegetables from the salad bar (to prevent us from dying of scurvy), we were quick to discover that most of the “vegetables” were potatoes… And there was slices of roast beef in the salad bar:

With all the beer and meat, those of us who were able to save room for desert were in for a treat: A decadent array of scrumptious and rich cakes. Needless to say, we were ALL sleeping on the bus ride back.

Fazenda Tozan

[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]

Tozan Farm (Fazenda Tozan) was established before the independence of Brazil in 198. The name comes from “To” meaning East and “Zan” meaning mountain, an allusion to Tai Zan mountain, and was a pseudonym for Hisaya Iwasaki, of the Iwasaki family – founder of the Mitsubishi Group.

The farm first belonged to Floriano de Camargo Peneado and originally only grew sugar cane, the first major crop of Brazil. His son, Caitan-Mor Floriano de Camargo Peneado took over the farm in 1854 and diversified the crops to include corn, rice and finally coffee. In 1885, the farm intensified its coffee growth. However, 1925 saw the “super growth” of coffee, dramatically increasing the supply of coffee much faster than demand, causing the price of coffee to plummet.

In 1927, the Iwasaki family, wanting to diversify their financial holdings in anticipation of financial “stress” (as it manifested in 1929 in New York), bought a large number of farms around the world including Tozan Farm. After purchasing these farms, they used their economies of scale to leverage technologies from different areas (for example, the “Vespa de Uganda”, a technology used to fight coffee “plague” affecting the plants). They also further diversified their farm holdings to include cotton, cereals, “practical reforestation” and Nelore cattle.

Since arriving in Sao Paolo, the popularity of coffee increased as it started following the coastal border of Brazil. Today, 65% of the coffee in Brazil is Arabica (sweeter) and the rest is Robusta (stronger).

The history of coffee itself is quite interestingly international as well. Originally discovered by an Ethiopian Sheppard from the city Cafa, he noticed that his sheep strangely “acted more aggressively” when they had eaten the fruit of a particular plant. Coffee then began to spread from that region and found its way to the Muslim world where the Arab’s were the first to roast the coffee beans and prepare coffee in the manner which we recognize it today (originally the beans were taken for their sweet juice). The Dutch, famous navigators, introduced coffee to Europe through Venice, where the first coffee shop was opened (and we are told is still there).

Peiro was translating for our guide, who didn’t speak any English, however, there are somethings for which you don’t need a translator. His passion for coffee was quite apparent as he was animatedly speaking Portuguese while gesturing to the various devices and machines used in the past for the harvest and preparation of different varieties and grades of coffee beans.

Latin America Study Tour Begins

[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]

Our study tour begins on a lucky note, as all of us are able to come in on the same flight leaving Toronto (for the first years, this is immediately following our Operations Management exam and a quick round of pints at Bedford) where we had a quick bite and night cap at Pearson.

Upon arriving in Sao Paolo airport this morning, we were greeted by Peiro, our guide and Santana, our bus driver who took us to the hotel. Laura was there cheerfully waiting for us and welcomed us with a round of hugs. After the necessary paperwork and unpacking, a few of us felt a bit adventurous and began wandering the city under the leadership of “Bovespa”.

We found a fresh juice shop where we ordered a variety of exotic fruit juices: Mango, papaya etc. We proceeded to find a nice little restaurant serving a buffet of local fair. It was exceptionally interesting to try to explain that some of us were doing the all you can eat R$ 20,80 (R$ 1.6 = CND$ 1) while some were going for the food by weight R$ 2,80 per 100g.

After a bit of exploring in the city we found a beautiful lake with locals enjoying the good weather. Tomorrow, our study tour begins with a visit to a coffee plantation. A heavily resourced based economy and the B in BRIC countries, Brazil has a bright future as was highlighted in the Toronto CFA talk on Geopolitics of Investing. Coffee was one of Brazil’s earliest successful and staple exports and continues to play a large role in their economy today.