Identifier
Created
Classification
Origin
06RIODEJANEIRO601
2006-11-01 16:57:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Rio De Janeiro
Cable title:  

BRAZIL'S EMBRAER: SEEKING A U.S. DEFENSE RUNWAY FROM

Tags:  ETRD EAIR MARR BEXP BR 
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DE RUEHRI #0601/01 3051657
ZNR UUUUU ZZH
P 011657Z NOV 06
FM AMCONSUL RIO DE JANEIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 3031
INFO RUEHBR/AMEMBASSY BRASILIA 9453
RUEHSO/AMCONSUL SAO PAULO 4367
RUEHRG/AMCONSUL RECIFE 2723
RUEHBU/AMEMBASSY BUENOS AIRES 0481
RUEHMN/AMEMBASSY MONTEVIDEO 0320
RUEHAC/AMEMBASSY ASUNCION 0330
RUEHSG/AMEMBASSY SANTIAGO 0165
RUEHOT/AMEMBASSY OTTAWA 0015
RUEKJCS/SECDEF WASHINGTON DC
RUCOMFA/HQ USSOUTHCOM J3 MIAMI FL
RUEANHA/FAA NATIONAL HQ WASHINGTON DC
RUEATRS/USDOT WASHDC
UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000601 

SIPDIS

STATE PASS USTR:SCRONIN/MSULLIVAN
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE
STATE PASS EXIM FOR NATALIE WEISS, COCONNER
STATE PASS USTDA FOR AMCKINNEY
AID/W FOR LAC/AA

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EAIR MARR BEXP BR
SUBJECT: BRAZIL'S EMBRAER: SEEKING A U.S. DEFENSE RUNWAY FROM
WHICH TO SOAR

UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000601

SIPDIS

STATE PASS USTR:SCRONIN/MSULLIVAN
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE
STATE PASS EXIM FOR NATALIE WEISS, COCONNER
STATE PASS USTDA FOR AMCKINNEY
AID/W FOR LAC/AA

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EAIR MARR BEXP BR
SUBJECT: BRAZIL'S EMBRAER: SEEKING A U.S. DEFENSE RUNWAY FROM
WHICH TO SOAR


1. (U) Summary: On October 21 Admiral Edmund P. Giambastiani Jr.,
Vice Chairman of the Joint Chiefs of Staff, the Ambassador, and the
Consul General met with Embraer President & CEO Mauricio Novis
Botelho and Executive Vice President for Defense and Government
Market, Luiz Carlos Aguiar, to review bilateral commercial relations
between the U.S. and Brazil. Our Brazilian interlocutors discussed
Embraer's recent history and strong financial status, the company's
success in the regional and executive jet markets, and its desire to
continue doing business with the U.S., particularly in the defense
"niche market." Admiral Giambastiani emphasized the USG's need for
joint service platforms that maximize military utility and cost
efficiency. End summary.

EMBRAER'S POSITIVE RISK PROFILE


2. (U) Embraer's Botelho said he thought it would be fruitful to
talk about the benefits that both countries can gain with increased
partnership. He started out by focusing on Embraer's positive
financial status and risk profile, stating that he feels that
Embraer is a "good example of what free trade is all about," with US
20 billion dollars in exports last year and 10 billion dollars in
imports. 12 to 14 billion dollars worth of goods and services were
exported just to the US. Those statistics put Embraer just behind
Airbus (France) and Boeing (US) in the aircraft market, and vying
for third place with Bombardier (Canada). Botelho indicated that
Bombardier is technically bigger in terms of overall revenue, but
that Embraer has surpassed Bombardier in commercial aircraft.
Embraer represents approximately 50 percent market share at present
in 36 to 126-passenger aircraft.


3. (U) Operating in 69 countries, the company enjoys excellent
financial status and recently received an investment grade rating by
both Standard and Poors and Moody's. The company has a nearly US 14

billion dollar backlog of solid orders and an additional almost 15
billion dollars in options, totaling more than 2,000 aircraft, and
it has been ranked as one of the largest Brazilian exporters since

1997. It is a major player on commercial aircraft, and has a niche
operation in the defense market. In the U.S., Embraer has
facilities located in Ft. Lauderdale and in Nashville. In addition,
it recently announced that it will establish facilities in New
Hartford, CT and an additional one in Ft. Lauderdale, as well as one
in Mesa, Arizona which will potentially employ 250 workers.
Currently, Embraer has 38 additional service centers to sustain its
fleet of business jets.


4. (U) Embraer has developed risk-sharing partnerships with major
U.S. aerospace companies, including General Electric Engine Company,
Allison Engines (later purchased by RR),Honeywell, Hamilton
Sundstrand, C&D, and Goodrich. It also has relationships with
suppliers distributed among 25 U.S. states, and estimates that more
than 7,000 U.S. jobs were either created or maintained in 2005 from
a component purchase. More than 1200 aircraft have been sold to the
U.S., including 345 turboprops and about 800 jets. Airline customers
include American Eagle, Continental Express, Republic Airways,
Midwest, Tran States, Mesa, Gecas, US Airways, and Jet Blue.
Botelho characterized the 70-80, 100, and 126-seat jets as "small
big jets", saying they really don't meet the criteria of regional
jets anymore given their passenger capacity and comfort.

INVESTMENT IN THE FUTURE AND "PROTECTING THE CAMP"


5. (U) According to Botelho, the history of Embraer shows a
successful evolution from a state-owned enterprise to privately held
corporation. State-owned until December, 1994, it was privatized in
1995, when current management took control. In 1997, it reached
break-even in terms of profitability, and since then has steadily
grown. Embraer employs 19,000 employees worldwide, including 3,000
outside of Brazil, and has more than 4,000 engineers. From 2001 to
2005, about 540 engineers graduated with master's degrees
specializing in aeronautical engineering, all paid for by Embraer.
As Botelho says, "it's a business based on knowledge." The

RIO DE JAN 00000601 002 OF 003


Ambassador complimented Botelho on training some of the world's best
engineers and observed that Embraer is currently suing Gulfstream
for recruiting some of them away. Botelho said, laughing, "the
Admiral will understand this. We have to protect our camp."


6. (U) Adm. Giambastiani acknowledged that skilled people are in
tremendous demand, and asked what had brought Embraer to the
decision to provide the training. Botelho said that they had
analyzed the situation and realized there was not enough flow in
Brazilian universities to supply the demand. It was not the level
or quality of education available; Embraer's parastatal parent was
created in the 1950s, and its first dean had previously been the
head of the aeronautics department at MIT, so it was created with
the same curriculum and standards. "But," said Botelho,
"Competition is heavy. The investment banking sector takes a lot of
our engineers away. . . it is really our biggest competitor."

COMPANY STRUCTURE


7. (U) Embraer restricts voting power to five percent for any
shareholder, and limits foreign ownership to that of 2/3 of the
Brazilian shareholders. Botelho indicated that if any shareholder
reached 35 percent, Embraer would be forced to open the company to a
100 percent public offering. The GOB retains one voting share, to
assure veto power on such proposals as new military programs,
transfer of technology to other countries, changes in the bylaws,
and the ability of someone else to purchase the company. However,
said Botelho, even if a prospective buyer could achieve government
buy-in, the company is further protected: the prospective buyer has
to meet an asking price that is the value of the company plus 50
percent. As Botelho said, "That makes it less attractive." Embraer
shares are traded on the NYSE and Sao Paulo Stock Exchange at 60
percent and 40 percent of its shares, respectively-further
protection through market diversification.

FROM CORPORATE JETS . . .


8. (U) The Ambassador turned the conversation to small, private
business jets. Botelho said that five years ago, Embraer launched
the Legacy aircraft, with the intent to understand and learn how the
market for small, executive jets works. They "learned a lot," and
the Legacy-600 was born. From there, they launched a couple of new
product lines with specialized or niche markets. They do not plan
to build large numbers of these craft, but the intent is to "show
the market that they are following demand." They are also competing
effectively with larger and/or more expensive aircraft in terms of
comfort and features offered; Legacy aircraft are being very well
received, with about 320 orders so far, projected to be ready in two
tranches in mid-2008 and mid-2009. The executive jet market is
growing, and Botelho believes it will keep growing. As for defense,
he sees that as a "niche operation, with some opportunities."

TO POSSIBLE DEFENSE SALES TO THE USG


9. (SBU) The Admiral stated that while he does not negotiate
contracts, he would be happy to respond to Embraer's questions
regarding the direction in which the US is moving, in particular
with respect to intelligence, reconnaissance and surveillance (ISR)
aerial manned platforms. Adm. Giambastiani explained to Embraer
President Botelho and Vice President Aguiar that he is co-chairman
of the USG's Defense Acquisition Board and that all programs for
acquisition go through the Board. While there are a variety of
other mechanisms within OSD for contract solicitation, no programs
can go through without the Board's approval.


10. (SBU) Botelho said that Embraer looks at the defense market not
so much as competing with U.S. firms, but complementing U.S.
partners in competing for defense work. The reliability of its
originally proposed Aerial Common Sensor (ACS) aircraft [E-145] is
estimated at 99.75 percent. With prime contractor Lockheed Martin,
Embraer had been contracted to deliver 38 aircraft for the US Army,

RIO DE JAN 00000601 003 OF 003


and 19 aircraft for the US Navy, with deliveries anticipated from
2009 to 2017. The contract was awarded in August 2004 and
terminated in Jan. 2006. Botelho said that by the time the contract
was awarded, the ACS platform complied in total with stated
requirements, but when the program became Joint with the Navy and
requirements grew, it became evident that the E-145 could not meet
the increased weight, power and cooling requirements. Embraer
worked rapidly and flexibly to offer the larger E-190 instead, but
it was not feasible to effect the mission payload integration within
the costs of the program and the contract was terminated by the
Army. It "would have been a big hit for Embraer to serve the U.S.
government and to open new opportunities abroad," Botelho said
ruefully. As he put it, "Our situation today is that we have the
conditions to keep supplying value. Where and how are the
questions. I honestly do not know if there is additional
opportunity, and would like to hear from the U.S."


12. (SBU) The Admiral noted that a series of studies was
commissioned in the U.S. as to whether manned or unmanned platforms
would meet future military requirements. Unmanned platforms do not
meet all those needs, so there will be a program for a manned ISR
platform. However, the program will be Joint from its inception,
incorporating all Army and Navy needs up front. He said, "You will
see the U.S. come back in for solicitations and bids in 2007,"
cautioning once again that he does not handle that, but will be
reviewing requirements and cost drivers. But as he said, "We are
serious about the program. But it must be a joint program, a joint
operation, and a common platform." The Admiral stressed that the
U.S. military's focus for the future would be capability,
reliability, and cost effectiveness, including examining long-term
life cycle costs and energy efficiency. Botelho closed by saying
"We will compete strongly!"


13. (U) This cable was cleared by Ambassador Sobel and Admiral
Giambastiani's staff.

Martinez