Fernando Alcoforado *
UOL journalistic subject under the title Government will approve sale of Embraer to Boeing, says Presidency is available on the website <https://economia.uol.com.br/noticias/redacao/2019/01/10/acordo-boieng-embraer-golden-share-veto-governo-bolsonaro.htm>. The federal government has approved the sale of EMBRAER to North American BOEING, according to information from the Presidency of the Republic on Thursday (10/01). Note from the Presidency of the Republic states that the various scenarios have been thoroughly evaluated and that the final proposal preserves sovereignty and national interests.
The note informs that jobs in Brazil will be maintained. In addition, the government says that there will be no change in control on the Embraer part that will not be sold (the agreement provides for the purchase of 80% of the Brazilian manufacturer by Boeing), that the production of aircraft already developed will be maintained in Brazil and that there will be maintenance of all ongoing projects in the Defense area. Representatives of Defense, Science and Technology, Foreign Affairs and Economy participated in the meeting that decided to sell EMBRAER.
The note from the Presidency of the Republic that the sale of EMBRAER preserves sovereignty and national interests, that jobs will be maintained in Brazil, and that there will be no change of control of EMBRAER, is questionable. In an article that we published on 07/23/2018 with the title EMBRAER incorporation by BOEING is more a crime of homeland against Brazil we show that there will be the definitive denationalization of Embraer that will put in check the policy of productive and technological autonomy in the Defense area of Brazil, will affect the Brazilian industry that will be affected by the reduction of internal purchases of parts and components that will be carried out largely in the United States by Boeing and EMBRAER will lose control in the management of the company as a whole that will be assumed by Boeing. Both direct jobs at EMBRAER and suppliers of this company in Brazil will inevitably be affected because BOEING will give preference to the production of aircraft, parts and components in the United States. The text of our article published on 07/23/2018 is as follows:
EMBRAER INCORPORATION BY BOEING IS MORE A CRIME OF HOMELAND AGAINST BRAZIL
Fernando Alcoforado *
Boeing and Embraer announced on July 5 the agreement to unite their business, through the creation of a new company in which the US company will hold 80% of the commercial aircraft division of the Brazilian manufacturer that will have the remaining 20%. This is the second commercial agreement in the airline industry after Airbus bought half of Bombardier’s medium-range aircraft program.
Boeing and Embraer signed an agreement of intent to form a US$ 4.75 billion joint venture in the area of commercial aviation. Boeing, the world’s largest aircraft maker, is expected to pay US$ 3.8 billion for 80 percent of the joint venture. It should be noted that Joint Venture is a company created from the resources of two companies that unite and share costs and divide their financial results (profits and losses). While Boeing is the leading commercial aircraft manufacturer for long flights, Embraer leads the regional jet market with aircraft equipped to fly smaller distances. The joint venture will be led by a team of executives in Brazil, but Boeing will control the operations and management of the business as a whole.
The transaction still depends on the endorsement of the shareholders – among which, in the case of Embraer is the Brazilian government – and the regulatory bodies of the Brazilian and American market. The transaction is expected to be closed by the end of 2019, between 12 and 18 months after the definitive agreements. Boeing and Embraer team up to try to consolidate two strong operations in the same business, one for long-distance aviation, another for regional displacements capable of facing a similar merger between the major competitors, Airbus and Bombardier, who also joined.
Boeing and Embraer were already partners in several projects before announcing the negotiation of a merger. The two companies have, for example, a joint research center on biofuels for aviation in São José dos Campos since 2015. The federal government is owns a golden share in Embraer, which guarantees veto power in strategic decisions of the company, among them the transfer of share control of the company. Embraer was privatized in 1994, at the end of the Itamar Franco government, for R$ 154.1 million (values of the period), when the Brazilian government obtained the power to decide on the company.
It should be noted that most of Embraer’s shares are held by the US management company Brandes Investments Partners, which exercises control over 14% of the company’s shares. Although with a restricted participation of 5.4% of the shares, the federal government has the prerogative of the golden share that allows it control over strategic decisions of the company and, potentially, the veto to any type of merger or acquisition.
The golden share in the context of Embraer has greater strategic relevance due to its importance for the country’s defense industrial base, translated especially in the close relationship with the Brazilian Air Force (FAB) projects. The only Brazilian company to be included in the ranking of the 100 largest defense companies in the world, arms sales of Embraer accounted for 15% of all business conducted by Embraer in 2016, according to data organized and provided by the Stockholm International Peace Research Institute (SI- PRI).
Faced with such a discrepancy in capabilities and size, the uncertainties and concerns surrounding a possible incorporation of Embraer by Boeing are even more acute when considering the performance of the Defense and Security division of the Brazilian company. The incorporation of Embraer by Boeing makes it impossible to promote productive and technological autonomy in the Defense area of Brazil. The desired independence from external suppliers in the military can be put in check with the incorporation of Embraer by Boeing.
Under the FX-2 project, focused on the development and acquisition of new multi-purpose fighters for FAB, Embraer is the national leader in the agreement with the Swedish Saab for the Gripen project. In addition to being an important player in the process of technology transfer, which, among other mechanisms, has been developed through the Center for Projects and Development of Gripen. It should be noted that Boeing, through the F-18 Super Hornet proposal, was defeated in the competition by the contract to acquire new fighters for the FAB, which leads to questions about the potential consequences of the negotiations between Boeing and Embraer on the technologies obtained in the scope of the partnership with Saab, as well as on the future of the Gripen program.
The incorporation of Embraer by Boeing may, in the limit, rather than to represent the renunciation of the already weakened objective of technological autonomy in the military industrial sector of Brazil, signify the definitive denationalization of a company that was sold to the foreign capital in 1994. One cannot talk about a merger of a giant company with a pygmy of the air sector but incorporation of a pygmy by a giant. Just compare the sizes of Boeing with that of Embraer economically.
Boeing is the largest and most profitable aircraft manufacturer in the world. Boeing earned US$ 93.3 billion in 2017. Every US$ 1 in sales, US$ 0.60 comes from commercial aircraft sales. In 2017 alone, this area delivered 763 aircraft to airlines around the world. The US company has an order book of about 5,800 commercial aircraft, valued at US$ 421 billion. Among the major manufacturers, Boeing has the largest share of its revenue from its division that manufactures aircraft for Defense, Space and Security. Warships and cargo planes account for 22.5% of the company’s revenue.
It is important to note that Boeing has established itself as one of the largest defense companies in the United States and the world. The high costs involved in the development and production of new armaments, which are gradually more complex in technological terms, and the difficulties in guaranteeing productive scale from the domestic market, have boosted the internationalization of arms production. Boeing’s defense orders are valued at US$ 50 billion, of which 60 percent were made by the United States Armed Forces. Boeing’s dependence on the US government is one of the problems of its business. Just under a third of the company’s revenue is the result of contracts with the United States public administration.
Embraer, which that was born from aircraft designs at the Aerospace Technical Center (CTA) and the Aeronautical Technological Institute (ITA), only took off in 1969 after receiving investment from military governments. State-owned company until 1994, when it was privatized and denationalized, Embraer is the largest aircraft manufacturer in Brazil and the main supplier of the Brazilian Air Force (FAB).
In 2017, Embraer’s commercial aviation area accounted for 57.6% of the company’s net revenue, with US$ 10.7 billion from a total of US$ 18.7 billion. The company does not depend on revenue from its Brazilian military division, which accounted for R$ 3 billion, or 16.3% of revenue in 2017. The contracts arising from the company’s military origin were supplanted by the specialization in manufacturing small aircraft. Financial data show this, since commercial aviation accounts for R$ 10.7 billion, 57.7% of revenues, while the share of executive aviation, whose revenues are R$ 4.7 billion, is 25%.
While the Brazilian population was distracted by the World Cup, another crime of homeland was being practiced in Brazil with the definitive denationalization of Embraer that will put in check the policy of productive and technological autonomy in the area of Defense of Brazil, will impair the Brazilian industry that will be affected by reduced domestic purchases of parts and components that will be made largely in the United States by Boeing and will lose control in the management of the company as a whole that will be assumed by Boeing.
* Fernando Alcoforado, 79, holder of the CONFEA / CREA System Medal of Merit, member of the Bahia Academy of Education, engineer and doctor in Territorial Planning and Regional Development by the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning and planning of energy systems, is the author of 14 books addressing issues such as Globalization and Development, Brazilian Economy, Global Warming and Climate Change, The Factors that Condition Economic and Social Development, Energy in the world and The Great Scientific, Economic, and Social Revolutions that Changed the World.
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