Embraer in China

UVA-S-0151
Dec. 31, 2008
EMBRAER IN CHINA
The brown air prevented Frederico Curado from seeing barely three meters ahead of the
wing of his airplane as it landed in Beijing in late October 2007. Curado was in China to visit the
Harbin airplane assembly plant in Manchuria, the result of Embraer’s joint-venture with the
state-owned Chinese company AVIC II. Recently appointed as CEO after eight years as
executive vice-president of the Airline Division, Curado had been one of the key architects of
Embraer’s global expansion.
The Harbin plant was established in 2002 to assemble the Embraer Regional Jet (ERJ)
145, the 50-seat plane used in regional passenger travel. After a disappointing period with only a
small number of orders from Chinese airlines, in late 2006 Embraer received 100 orders: for 50
of the ERJ 145s, to be assembled in China and for 50 EMBRAER 190s (a larger, newer 108-seat
aircraft), to be exported from Brazil. Still, several challenges lay ahead. AVIC I, the other
Chinese state-owned aircraft corporation, was planning to launch a new family of regional jets,
the ARJ21 to compete head-on with the EMBRAER 190 family. Also, regional travel in China
was still emerging, and the development of new routes was heavily regulated by the government.
It was time to disembark, and Curado could not help thinking about what Embraer should
do to foster sales in the region, while at the same insulating itself from escalating competition.
Embraer1
Embraer was founded in 1969 in São José dos Campos, State of São Paulo, under the
leadership of aeronautic engineer Ozires Silva, who, with French designer Max Holste, was
responsible for the development of the first successful Brazilian aircraft: the 19-passenger
1
Information in this section was drawn from I. Avricher and M. Caldas’s paper, “Brazil’s Embraer and Porter’s
National Competitive Theory,” presented at the Strategic Management Conference in 2002; P. Ghemawat and G.
Herrero, and L. F. Monteiro’s Harvard Business School case, “Embraer: Global Leader in Regional Jets” (9-701-
006); F. Lopes, A. Zimath, and A. Maat’s Darden School case, “Embraer: Shaking Up the Aircraft Manufacturing
Market,” (UVA-S-0135); and http://www.embraer.com.
This case was prepared by Professor Sergio Lazzarini (Ibmec São Paulo) in collaboration with Professor L. J.
Bourgeois (Darden). It was written as a basis for class discussion rather than to illustrate effective or ineffective
handling of an administrative situation. We thank the helpful assistance by Maria Beatriz Oliveira Moraes and
Leandro Souza with data collection. Copyright © 2008 by the University of Virginia Darden School Foundation,
Charlottesville, VA and Ibmec Sao Paulo. All rights reserved. To order copies, send an e-mail to
sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation. ◊
This document is authorized for use by Sze Ching Cecilia Chow, from 12/1/2018 to 4/1/2019, in the course:
STRT-460-0-31: International Business Strategy - Levy (Winter 2019), Northwestern University.
Any unauthorized use or reproduction of this document is strictly prohibited.
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turboprop, Bandeirante. The company was initially a state-owned firm, drawing on capabilities
of the Aeronautical Technical Center and the Aeronautical Technology Institute—research and
educational centers that developed technology and trained engineers, respectively.
In 1985, Embraer launched a second turboprop: the 30-seat Brasília. Although sales were
fairly strong until the late 1990s (about 350 units were sold), Embraer experienced significant
financial losses during this period from a combination of macroeconomic problems in Brazil and
a disastrous new product launch (the CBA123). This financial crisis led to the privatization of the
company in 1994, when a consortium led by the Brazilian group Bozano, Simonsen S.A.
acquired a large portion of Embraer equity and appointed Mauricio Botelho as CEO in 1995.
Botelho restructured and repositioned the company, placing particular emphasis on the
50-passenger ERJ 145, a jet that had been under development since 1989. The ERJ 145 was a
huge commercial success, receiving large orders from established regional carriers such as
Continental Express and American Eagle. By 1997, the plane accounted for around 60% of
Embraer’s revenues and helped restore the financial stability of the company. Embraer became
Brazil’s largest exporter as well as a leader in the worldwide market for regional jets.
In the late 1990s, the company developed a new family of jets with a larger number of
seats (70–120): EMBRAER 170, 175, 190, and 195, also known as E-Jets. These jets were
another commercial success for Embraer, as it targeted airlines that were looking for a plane that
could be used for shorter domestic routes and also accommodate more passengers than the
existing regional jets. By the time its first EMBRAER 170 took off in February 2002, Embraer
had a backlog of 112 firm orders and 202 options for the whole 170/190 family.
The E-Jets also consolidated a product-development approach begun with the ERJ 145.
Embraer’s core capability was designing airplanes and coordinating the suppliers involved in
their assembly. Embraer structured risk-sharing partnerships with the suppliers of key parts,
including GE (engines), Gamesa (empennage and back fuselage), Honeywell (avionics), and
others, who provided capital and knowledge for developing new product lines, expecting in
return a long-term deal and reasonable prices for the parts.2 Embraer, like other aircraft firms,
started acting more as a system integrator than a vertically integrated manufacturer. Embraer
itself manufactured only a few core jet parts—mainly, the cockpit and the wings—while several
other parts were procured globally.
In 2006, commercial jets accounted for about 70% of Embraer sales, with North
American and European airlines the largest customers. Exhibit 1 presents the breakdown of
Embraer’s deliveries according to region and product type. By April 2007, under CEO Frederico
Curado, in addition to supplying the airline market with commercial jets, Embraer had sales
divisions for Executive Aviation, Government and Defense, and Services. Mauricio Botelho
stayed in the company as president of the board.
2
From a paper by P. S. Figueiredo, G. A. Silveira, and R. Sbragia, “Risk-Sharing Partnerships with Suppliers:
The Case of Embraer,” presented at the 2005 International Association for Management of Technology Conference,
in Vienna, Austria.
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The Global Aircraft-Manufacturing Industry
Large jets (more than 120 seats)
Large passenger jets accounted for about 85% of yearly orders in the overall commercial
aircraft industry, which was dominated by Boeing in the United States and Airbus in Europe.1
Boeing’s major products included the 737 (140–190 seats), used mainly by domestic
carriers on shorter routes, the 777, a long-range jet with around 350 seats, and the 747-400, with
more than 400 seats and used mainly for long international routes. With the development of the
fuel-efficient 787 Dreamliner, Boeing intensified its focus on a long-range aircraft that would
allow passengers to travel on the longer, point-to-point routes instead of the traditional hub-and-
spoke networks concentrated in the large airports. Equipped with 200–300 seats, the 787 was
expected to be delivered in 2008. By October 2007, Boeing had scored more than 700 firm
orders for this jet, making it a significant commercial success.
By contrast, Airbus was betting on the intensification of hub-and-spoke networks, which,

to avoid congestion and capacity constraints at existing airports, would require an aircraft even
larger than the Boeing 747. In 2000, the company had started development of the superjumbo
A380, to carry more than 550 passengers.2 Delays in the production process and a backlog of
orders below initial expectations, however, placed doubts on the viability of the project and
triggered a replacement of top executives.
In the meantime, Airbus attempted to compete with Boeing’s 787 Dreamliner with its
new A350, which was perceived neither as efficient nor as attractive as the 787. Other major
Airbus jets included the A320 (150 seats), the A300 (265 seats), and the long-range A330 (300
seats).
Regional jets
Although regional jets accounted for only 13% of the global market for commercial
aircraft, demand was growing because of structural changes in the industry. In several countries,
these carriers increasingly exploited the direct (point-to-point) connections with smaller cities
and the lack of congestion at secondary airports. For such direct connections, typically with a
smaller number of passengers per flight, these smaller airplanes were more appropriate.
In the United States, the market for regional jets had been constrained by “scope clauses,”
emanating from strong lobbying efforts by pilots’ unions, to inhibit the entry of large commercial
firms into regional routes with the use of smaller jets. Pilots feared that by entering regional
markets, traditional companies would attempt to reduce wages; however, after September 11,
2001, airlines were forced to exploit regional markets as a way to increase revenues and
1
“Industry Surveys: Aerospace & Defense,” Standard & Poor’s, November 2006.
2
M. Kane and Benjamin Esty, “Airbus A3XX: Developing the World’s Largest Commercial Jet (A)” (201028),
Harvard Business School case.
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consequently, had to adjust the size of their fleet. The interest in using smaller jets to target the
shorter regional routes soared, particularly for the medium-sized jets with 70–120 seats. The
EMBRAER 170/190 family benefited directly from this change.
Exhibit 2 depicts the market shares of the major regional jets by manufacturer and seat-
size segments. Embraer’s major competitor was Canada’s Bombardier—a corporation operating
not only in the aircraft business but also in other sectors, including equipment and financing.
Bombardier entered the market for regional jets in 1992 with the 50-seat CRJ 100/200 and soon
faced strong competition from Embraer’s ERJ 145, which was perceived as more economical
and technically superior.3 But its financial losses mounted and restricted Bombardier from
launching new products. Finally, in 2004, the company initiated development of the CSeries, a
new family of jets for 110–145 passengers, which would compete head-on with the EMBRAER
170/190 family.4 After receiving too few orders, Bombardier called off the project and started
working on stretched versions of the CRJ 100/200—the CRJ 700, 900, and 1000 (70–100 seats).
In January 2007, however, the company resumed development of the CSeries with the C110 (110
seats) and C130 (130 seats), and the first delivery was expected in 2013. Exhibit 3 presents
comparative data on Embraer and Bombardier deliveries, and Exhibit 4 shows comparison of the
financial results.
Although both Airbus and Boeing focused on larger planes, they also had regional jets.
Boeing’s smallest plane was the 114-seat 717, which was perceived as less efficient than the
competing Embraer and Bombardier jets, so Boeing discontinued the 717 in 2005.5 Airbus, in
turn, had the 109-seat A318—a shortened version of the A320; however, orders for this plane
were weak.
Other players tried unsuccessfully to establish themselves in the regional jet market.
Fairchild, a former U.S. company bought by German manufacturer Dornier, was declared
insolvent in 2002. The license for its main 32-passenger regional jet was then acquired by the
U.S. company AvCraft Aviation in 2003, which declared insolvency in 2005, and subsequently
repositioned itself as a service provider for the industry.
Trends in Global Traffic and the Rise of China
After recovering from the shock of September 11, global air traffic began a slow
recovery. Although almost 63% of global traffic remained concentrated in North America and
Europe, traffic originating in the Asia-Pacific countries increased sharply. China exhibited not
only the largest volume of traffic but also one of the largest growth rates. The increase in per-
capita income, especially in urban regions, increased demand, which was met by expanding seat
capacity in planes and developing new routes. Growth was expected to remain strong, especially
3
Ghemawat, Herrero, and Monteiro.
4
Lopes, Zimath, and Maat.
5
Lopes, Zimath, and Maat.
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in domestic traffic. Boeing forecasted China’s annual domestic-traffic growth at 8.8% for 2006–
26 (Exhibit 5), compared with around 5% for the world as a whole.
Despite the strong prospects for domestic traffic in China, its regional aviation was
underdeveloped. By the end of 2006, regional routes accounted for only 3.5% of its total airline
traffic. Major routes were still concentrated on a few airport hubs, especially on its east coast
where 20% of its airports were responsible for about 80% of its passenger traffic. A surge in
regional traffic would require aggressive investments in airport infrastructure throughout the
country. According to Gao Hongfeng, vice-minister of the General Administration of Civil
Aviation of China (CAAC), which regulated the airline industry, “By 2010, the mainland will
have about 186 airports, up from 142 currently.” 6 Around (Chinese yuan) CNY140 billion were
expected until 2010 to expand such existing airports as Beijing, Shanghai, and Guangzhou and to
improve the airport infrastructure in central, western, and northeastern China.7 On the demand
side, because economic growth in China was concentrated in its largest cities and industrialized
regions in the East (Exhibit 6), the future expansion of regional traffic would depend on
governmental policies to reduce regional inequality and increase per-capita income in poorer
locations in the central and western regions.
Furthermore, in early 2007, about 65% of seats offered in the domestic mainland market
were concentrated in three government-controlled carriers: Guangzhou’s China Southern
Airlines, China Eastern Airlines, and Air China (Exhibit 7).8 These carriers, however, were
located in the major hubs of Guangzhou, Shanghai, and Beijing, respectively, and typically
operated large planes. Although in the United States, the 30- to 120-seat planes represented about
34% of the 30- to 210-seat fleet, in China this proportion was only 7%. Entry by new carriers
targeting new alternative routes was timid; new private airlines, responsible for only 4% of
domestic capacity, were struggling to cope with scale limitations and trying to find profitable
market niches.
The central government had no apparent plan to reduce concentration in the domestic
market and ease entry. On the contrary, given that several domestic airlines were facing losses or
low profitability, the government indicated a desire to increase control over entry and seat
capacity.9 To exploit new routes, companies had to demonstrate not only that they could carry
out safe and sound operations but also that they would have the necessary resources to do so. For
instance, with the rapid increase in domestic traffic, companies had trouble finding qualified
pilots. As stated by Yang Yuanyuan, Minister of the CAAC, “We believe it would be fine to
maintain three major carriers based on the situation of the airline industry.”10
6
“Nation to Boost Spending on Airport Infrastructure,” english.eastday.com (accessed on March 2, 2006).
7
“China’s Key Transport Infrastructure Projects for 2006–2010,” Xinhua, March 6, 2006.
8
Center for Asia Pacific Aviation, Aviation Analyst, 59 (April 2007) and 79 (July 2007).
9
Center for Asia Pacific Aviation, Aviation Analyst, 79 (July 2007).
10
www.centreforaviation.com/aviation (accessed on October 17, 2007).
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Entering China
The Chinese aircraft industry11
In 1993, after dispersed and failed efforts to create a thriving domestic aerospace
industry, the Chinese government centralized all aircraft manufacturing enterprises into one
single company, Aviation Industry Corporation (AVIC). AVIC attempted several initiatives to
develop and assemble jets in collaboration with Boeing, McDonnell Douglas, and Airbus. The
failure of these initiatives and government intent to foster competition in the domestic market
led, in early 1999, to the breakup of AVIC into two separate companies, AVIC I and AVIC II,
with both companies remaining fully state-controlled.
When the two entities were formed, AVIC I consisted of 53 industrial enterprises and 31
research institutes, about 295,000 employees, and total assets of CNY34.9 million. AVIC I
subsidiaries focused on military aircraft such as bombers and fighter planes, and their parts.
Airbus and Boeing subcontracted the production of several parts of the A320 and Boeing 737 to
AVIC I subsidiaries Xi’an, Shenyang, and Chengdu. AVIC II, in turn, owned 54 enterprises and
three scientific research institutes. It employed 210,000 workers and controlled assets of
CNY31.5 million. AVIC II also produced automobiles, motorcycles and related engines and
parts, textile machinery, medical apparatus, and other nonaviation products. Services included
aircraft leasing, engineering, contracting, and import and export services.
The central government fostered the aerospace industry in China through several
mechanisms. The government imposed tariffs on aircraft parts and planes manufactured abroad.
Foreign manufacturers intending to enter China were required to share technology with local
firms and engage those firms in the process of assembly and, whenever possible, production of
parts. In the late 1990s, German manufacturer Fairchild Dornier failed to enter the Chinese
market because it did not agree to establish local assembly lines and pursue joint development
with local firms. Two government agencies had an impact in defining policies for the aircraft
industry: COSTIND (Commission for Science, Technology, and Industry for National Defense),
in the aircraft sector, and NDRC (National Development and Reform Commission), to deal with
economic development in general.
Embraer’s entry: early attempts
Embraer’s decision to enter the Chinese market was not straightforward. In the late
1990s, Embraer intended to export jets assembled in Brazil to China, betting on the future of
regional aviation in that country. In May 2000, the company established a commercial office in
China, led by a Brazilian of Chinese descent, Guan Dongyuan. One month later, the company
finalized the first sale of five ERJ 145 planes to China’s Sichuan Airlines. In November 2000,
Embraer received another 30 firm orders and 15 options. Meanwhile between the order and the
delivery date, to protect its struggling regional-aircraft industry, the Chinese government
11
Information for this section is mostly based on A. Goldstein’s “The Political Economy of Industrial Policy in
China: The Case of Aircraft Manufacturing,” William Davidson Institute Working Paper 779, July 2005.
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increased the tariff on imports of small-sized jets from 7.1% to 22.9%. Embraer’s planes became
too expensive, causing Chinese clients to renege on their initial orders. In December 2001, four
planes were assembled in Brazil but were never delivered to China.12 Even the personal
intervention by Brazilian President Fernando Henrique Cardoso, who had good relations with
Chinese President Jiang Zemin, was unsuccessful.13
Subsequently, Embraer executives started to consider assembling its jets in China.

Establishing a local plant would meet the central government’s requirement that foreign aircraft
manufacturers should not only attempt to export assembled products but also carry out local
production and engage, whenever possible, local Chinese suppliers.
The deal with AVIC II
In March 2001 (prior to the tariff event that triggered Embraer’s decision to invest in an
industrial plant in China), Embraer signed a letter of intent with AVIC II. The goal of the
agreement was to share manufacturing technology and develop products for the Chinese market.
Given Embraer’s intention to establish an industrial plant in China, the deal quickly evolved into
a full-blown joint venture with two AVIC II firms: Harbin Aircraft Industry Group (HAIG) and
its subsidiary Hafei Aviation (HAFEI), which were already engaged in manufacturing
helicopters, auto engines, and small turboprop aircraft.
Relations between China and Brazil were favorable, since they had previously established
collaboration agreements in satellite and space research,14 and there was no serious commercial
dispute involving the two countries. A deal was signed in December 2002 and involved an
investment in the Harbin airplane assembly plant within Hafei’s industrial complex in
Manchuria, designed to assemble ERJ 145 jets. It was different from most foreign joint ventures
in China, in that Embraer managed to keep control rights of the joint venture with a 51% equity
stake. The new enterprise was named Harbin Embraer Aircraft Industry Co. Ltd.
Harbin Embraer
Organization
Roberto Rossi de Souza, was appointed general manager of Harbin Embraer in 2004,
after working at Embraer in Brazil since 1972. To assist de Souza with local affairs in China,
Jiang Da was appointed deputy general manager. Jiang Da previously worked at Hafei and had
extensive experience in aircraft manufacturing. Rossi answered to a board consisting of a
chairman from HAIG, a vice-chairman from Embraer, and five members (two from Hafei/AVIC
II and three from Embraer). Exhibit 8 depicts the organization of the joint venture.
12
H. Rzezinski, “China: Oportunidades e Desafios—O Caso Embraer,” Conference presentation in 2007.
13
Goldstein.
14
Goldstein.
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The board met twice a year, essentially to approve an annual strategic plan for Harbin
Embraer that included annual budgeting, to establish quantifiable goals, and to evaluate the
performance of the joint venture. In practice, once the plan was approved, Harbin Embraer
managers operated with high autonomy to execute the plan and promote the necessary
adjustments. According to Rossi, “There is no interference on daily decisions.”
Operations
In January 2003, the Chinese plant began operations with an assembly capacity of 11 jets
per year. Productivity was expected to increase to 15 jets per year by 2008, and in the future, the
workforce would expand in order to reach a capacity of 24 planes per year in the same assembly
plant. By contrast, the production of ERJ 145 planes in São José dos Campos was from 16 to 18
planes per month. Because of reduced demand for ERJ 145s, especially in the United States, in
2006, Embraer ceased the assembly of these jets in Brazil and used their former assembly line to
manufacture Legacy corporate jets, which shared the same production platform; however, there
were no plans to assemble the 170/190 E-Jets in China.
In the beginning, for operations at Harbin Embraer, all Chinese workers were trained in
Brazil, and Embraer secured the transfer of quality procedures and monitoring of the assembly
process. Considerable efforts were made to control and meet quality standards. Harbin Embraer
managers considered the task of preparing a technician to be fully qualified for an assembly job
to require at least 10 months of intense training and on-the-job coaching. By 2008, most training
and coaching was expected to be performed by the managers and technicians of Harbin Embraer.
Aircraft parts represented by far the largest portion of assembly costs. Typically, parts
came from 250 suppliers in several parts of the world—the same portfolio of suppliers for
Embraer in Brazil. For example, engines came from Rolls Royce in the United States. Contracts
to preserve intellectual property were signed, stating that the Chinese partner could not purchase
items directly from the selected suppliers without full consent from Embraer. Furthermore, core
parts of the plane (e.g., essential fuselage, pipeline, and electrical parts), which Harbin Embraer
referred to as a kit, were sent directly from Brazil. Until 2007, no essential supplies were
procured in mainland China, although there were plans to engage a local Chinese supplier in the
assembly and production of specific parts of the fuselage.
Culture
By late 2007, Harbin Embraer had approximately 260 employees, of which 13 were
Brazilian. Most of these Brazilians had previously worked for Embraer and occupied managerial
and quality-control jobs. The bulk of the labor force was Chinese and had been transferred
directly from Hafei. The official language of the joint venture was English; Brazilians working at
the Harbin plant found it difficult to master Mandarin. So, given that English was not native to
virtually all people working at Harbin Embraer, gesticulation was often a necessary means of
communication on the assembly line.
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Despite these difficulties, both Brazilians and Chinese agreed that interaction was
smooth. The Chinese viewed Brazilians as friendly and flexible in accommodating necessary
changes in operations. The Brazilians saw the Chinese as eager to learn and showing a marked
sense of responsibility.15 General Manager Rossi thought that there was a “natural affinity”
between the Brazilians and the Chinese. Deputy General Manager Jiang Da observed that “once
you put people together they start working as one family.”
Sales
Initial sales were below expectations. By January 2003, China Eastern and China
Southern Airlines had placed only 16 orders; Embraer executives blamed the slow pace of
regional traffic development. The situation reversed itself in December 2006, when the joint
venture received an order for 50 ERJ 145 jets from Hainan Airlines. Four of these ERJ 145 jets
were expected to be delivered by December 2007. With this order, the plant would be producing
at full capacity until 2010. Hainan also placed an order of 50 EMBRAER 190s to be assembled
in Brazil. Unlike the import tariff for small aircraft such as the ERJ 145, the import tariff for
larger planes—larger than the EMBRAER 170—was still kept at the low level of 5%.
Because Harbin Embraer lacked dedicated personnel for marketing and sales, it relied on
Embraer’s commercial sales office in China, for which it paid Embraer royalties and commercial
fees. The sales process for Chinese carriers was very complex. Embraer’s commercial office first
had to convince airline companies that regional routes were profitable; the process often
involved detailed consulting on which specific routes could be exploited. Then the airlines had to
convince CAAC that they would operate the route with high safety standards, and external-
relations officials would judge whether the nation of the aircraft manufacturer had any serious
conflict with China. Finally, NDRC officials would have to analyze whether the product
involved adequate technology. Only then could a Chinese carrier enter into a purchase agreement
with the aircraft manufacturer.
New Entrants
AVIC I (China)
Embraer would soon face competition from a project under development since 2002 by a
consortium of AVIC I subsidiaries (ACAC): the ARJ21 family of jets. This family was intended
to target the 70- to 120-seat market with two versions: the ARJ21-700 with 70–95 seats and its
stretched version the ARJ21-900 with 95–105 seats. By October 2007, the family had a backlog
of 35 firm orders from domestic carriers such as the Xiamen and Shanghai airlines, with first
delivery expected in two years. Although most parts for the assembly of the ARJ21 and the
overall design were to be provided by members of the ACAC consortium under AVIC I, part of
the manufacturing technology originated from an early project involving the assembly of the
15
From a paper by G. Azevedo, “Brazilian Management in China and a Theory on the Formation of Hybrid
Organizational Cultures,” presented at the EGOS Conference in 2008.
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McDonnell Douglas MD-80/90 jets, in the 1980s and early 1990s. (The MD-80/90 was also the
basis for Boeings 114-seat 717. Boeing had acquired McDonnell Douglas in 1997.) McDonnell
Douglas was one of the few companies that had not imposed strong restrictions on the transfer of
technology, allowing Chinese companies to control most of the process of assembly and
production of parts, namely, the AVIC I subsidiaries Xi’an, Shenyang, and Chengdu, which
would later on be involved in the ACAC consortium to develop the ARJ21.
In June 2007, Bombardier and AVIC I announced an agreement to collaborate on the

development of the stretched version of the ARJ21, in which the Canadian manufacturer agreed
to invest US$100 million in the project. According to Lin Zuo Ming, president of AVIC I, the
deal would allow partners to “effectively evaluate current projects, identify areas of mutual
collaboration and explore future endeavors that will further develop this relationship of
cooperation.”16
Sukhoi (Russia)
Previously focused on military aircraft, the Russian state-owned Sukhoi Corporation was
attempting to increase its presence in the civilian aircraft market with its new Superjet 100, a
medium-sized aircraft in the 75- to 95-seat range. Developed in 2001 with the help of Boeing
and other risk-sharing partners such as Thales and Honeywell, as well as Italian firm
Finmeccanica (which owned 25% of Sukhoi’s Civil Aviation Division), the Superjet 100
received 98 orders by October 2007 and was expected to be delivered by late 2008. Sukhoi
claimed that the Superjet 100 was more efficient than the competing Embraer and Bombardier’s
aircraft because it was more comfortable and less costly.17 At first, the goal would be to target
Russian and western airlines; however, the possibility of exploiting East Asia was under careful
consideration. China, in particular, was already a client of Sukhoi’s Military Division and, in
1996, agreed to assemble Sukhoi fighters in the mainland.
The Airbus joint venture in China
On June 2007, Airbus signed a joint venture with Chinese partners to invest in an
industrial plant in the city of Tianjin, located on the north coast in China, to assemble A320 jets.
Similar to Embraer, Airbus managed to keep 51% control of the venture.18 The Chinese partners
were the Tianjin municipal government, AVIC I and AVIC II. Production would start by 2009.
Apparently, there was no intention of assembling smaller-sized Airbus jets.
Challenges Ahead
Frederico Curado was optimistic about the market prospects in China. Exhibit 9 presents
a detailed breakdown of Embraer’s forecasts of global deliveries involving regional airplanes
16
“Bombardier, China’s AVIC Partner on Commercial Aircraft,” Manufacturing.Net, June 18, 2007.
17
“Sukhoi’s Phoenix,” Economist, October 20, 2007.
18
“China-Airbus JV to Deliver 300 A320 Planes by 2016,” China Daily, June 29, 2007.
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(including all aircraft manufacturers). Curado explained: “China, as a country, is probably the
second-largest market for us. We are focusing on planes in the 30- to 120-seat range, and we see
[a demand for] more than 1,000 planes over the next 20 years.”19 But despite his optimism,
Curado knew that there were several risks involved that ranged from the myriad of obstacles to
the future development of regional travel in China to the challenges imposed by escalating
competition. As he made his way to the Harbin plant to meet with Harbin Embraer executives, he
wondered about possible actions to circumvent those risks.
19
“Embraer Says China Will Make Up 60% of Asian sales,” Bloomberg, April 4, 2007.
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Exhibit 1
EMBRAER IN CHINA
Embraer Deliveries According to Region and Seat Range
100% 2%
2%
12% 2%
90% 14%
3%
3% 18%
80% 7%
70% 22%
Other
60%
Latin America
50% Asia
40% Europe
77% 60% 77% North America
30%
20%
10%
0%
91‐120 seats 61‐90 seats 30‐60 seats
5% 14% 80%
Percentage of total deliveries
Source: Embraer.
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Exhibit 2
EMBRAER IN CHINA
Evolution of Market Share of Small- and Medium-Sized Aircraft by Company
30‐ to 60‐seat planes
80%
70%
60%
50%
40%
30%
20%
10%
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
EMBRAER BOMBARDIER AVCRAFT
61‐to 90‐seat planes
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
EMBRAER BOMBARDIER FAIRCHILD DORNIER
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Exhibit 2 (continued)
91‐to 120‐seat planes
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
EMBRAER AIRBUS BOEING
Source: Embraer; F. Lopes, A. Zimath, and A. Maat, “Embraer: Shaking Up the Aircraft Manufacturing Market,”
Darden Business School Case (UVA-S-0135).
-15- UVA-S-0151
Exhibit 3
EMBRAER IN CHINA
Evolution of Embraer and Bombardier’s Deliveries of Small- and Medium-Sized Aircraft (Units)
Seats 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Embraer
EMB110 15–21 1 - - - - - - - - - -
EMB120 30 17 10 13 7 - 2 - - - - -
ERJ 135 37 - - - 16 45 27 3 14 1 2 -
ERJ140 44 - - - - - 22 36 16 - - -
ERJ 145 50 4 32 60 80 112 104 64 57 87 46 12
ERJ 145 XR 50 - - - - - - 18 - - - -
EMBRAER 170 70–80 - - - - - - - - 46 46 32
EMBRAER 175 78–88 - - - - - - - - - 14 11
EMBRAER 190 99–114 - - - - - - - - - 12 40
EMBRAER 195 108–122 - - - - - - - - - - 3
Bombardier
Q200 39 24 39 21 16 7 3 3 1 - 1 1
Q300 56 8 8 8 6 17 15 15 9 9 11 11
CRJ100/200 59 42 56 64 81 103 126 136 140 152 100 36
CRJ700 70 - - - - 2 29 29 50 50 64 47
CRJ705 75 - - - - - - - - - - 15
Q400 78 - - - 1 28 23 23 19 9 16 16
CRJ900 90 - - - - - - - 1 12 14 12
Source: Embraer’s Annual Report and Bombardier’s Annual Report.
-16- UVA-S-0151
Exhibit 4
EMBRAER IN CHINA
Evolution of Embraer and Bombardier’s Revenues and EBITDA, 2000–06
(in millions of dollars)
2000 2001 2002 2003 2004 2005 2006

Embraer
Revenue 2.394 3.235 3.638 3.085 4.803 4.288 3.916
EBITDA 515 985 1.108 659 921 506 447
Bombardier
Revenue 5.417 6.643 7.933 7.271 8.261 7.980 8.087
EBITDA 603 778 715 255 419 203 266
Source: Annual Reports of Bombardier (aerospace division) and Embraer.
-17- UVA-S-0151
Exhibit 5
EMBRAER IN CHINA
Traffic Involving Chinese Routes: Past and Expected Future Annual Growth (%)
14.0%
12.0% 11.2%
China‐China
10.0% 8.6% 8.8% China‐Europe
7.8%
8.0% China‐North America
6.4% 6.4% 6.4%
5.8% 5.9%
6.1% 6.0% China‐Northeast Asia
6.0% 4.6%
China‐Oceania
4.0% China‐Southeast Asia
2.0%
0.0%
1995‐2005 2006‐2016
Source: Boeing Current Market Outlook 2007
-18- UVA-S-0151
Exhibit 6
EMBRAER IN CHINA
Economic Growth in China: Per Capita GDP (RMB), 2001–05
25000
20000
Per capita GDP
15000
Coastal Region
Central Region
Western Region
10000
5000
0
2001 2002 2003 2004 2005
Source: National Bureau of Statistics of China.
-19- UVA-S-0151
Exhibit 7
EMBRAER IN CHINA
Main Airline Carriers in China (mainland) by Mid-2007
Carrier Share of Control Rights Number of Planes by Size (Seats)

Domestic
30–60 61–120 >120
Capacity
China Southern 30% Central Government, through China 6 5 264
Airlines Southern Air Holding
China Eastern Airlines 19% Central Government 13 - 199
Air China 16% Central Government - - 201
Hainan Airlines 8% Government, through HNA Group 31 - 79
Xiamen Airlines 6% China Southern Airlines (60%) and - - 43
Xiamen Construction and Development
Group (40%)
Shenzhen Airlines 5% Guangdong Development Bank (65%), 3 - 48
CNAC (Air China) (25%)
Sichuan Airlines 4% Sichuan Airlines Group, owned by the 5 - 30
government of the Sichuan Province
Shanghai Airlines 4% Joint stock company owned by financial 5 - 43
funds and local groups
Shandong Airlines 4% Air China 8 2 22
Source: Center for Asia Pacific Aviation, Aviation Analyst, Monthly Report #79, July 2007; information from company and other Web sites.
-20- UVA-S-0151
Exhibit 8
EMBRAER IN CHINA
Organizational Structure of the Harbin Embraer Aircraft Company
Board
Members: 4 Brazilian, 3 Chinese
Chairman: Chinese; Vice‐Chairman: Brazilian
General
Manager
Certification Deputy General

Manager
Finance/Adminis‐ Commercial Production Production Quality

nistrative
Regulatory environment
COSTIND: Commission for Science, Technology and Industry for National Defense
CAAC: General Administration of Civil Aviation of China
NDRC: National Development and Reform Commission
Source: Rzezinski, H., “China: oportunidades e desafios – o caso EMBRAER”, Presented at the conference

“Desafios emergentes: a ascensão econômica da China e da Índia e seus efeitos para o Brasil”, April 2007.
-21- UVA-S-0151
Exhibit 9
EMBRAER IN CHINA
Embraer’s Forecasts of Global Deliveries of Regional Aircraft, 2007–26
(includes all aircraft manufacturers)
Region Number of Planes by Size (Seats)

30–60 61–90 91–120
USA, Canada, and Caribbean 3850 1370 1535
Latin America 480 160 305
Europe 1290 520 700
Russia and CIS 505 140 230
Africa 130 75 45
Middle East 230 85 135
Asia Pacific 385 170 195
China 630 80 355
Total 7500 2600 3500
Source: Embraer Market Outlook.

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UVA-S-0151

Dec. 31, 2008

The Global Aircraft-Manufacturing Industry

Large jets (more than 120 seats)

By contrast, Airbus was betting on the intensification of hub-and-spoke networks, which,

Trends in Global Traffic and the Rise of China

The Chinese aircraft industry11

Embraer’s entry: early attempts

Subsequently, Embraer executives started to consider assembling its jets in China.

The deal with AVIC II

In June 2007, Bombardier and AVIC I announced an agreement to collaborate on the

The Airbus joint venture in China

EMBRAER BOMBARDIER AVCRAFT

EMBRAER BOMBARDIER FAIRCHILD DORNIER

EMBRAER AIRBUS BOEING

2000 2001 2002 2003 2004 2005 2006

Source: National Bureau of Statistics of China.

Carrier Share of Control Rights Number of Planes by Size (Seats)

Certification Deputy General

Finance/Adminis‐ Commercial Production Production Quality

Source: Rzezinski, H., “China: oportunidades e desafios – o caso EMBRAER”, Presented at the conference

Region Number of Planes by Size (Seats)

Source: Embraer Market Outlook.

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