To sell or not to sell: Embraer’s dilemma

When I started studying Latin American companies 20 years ago, Embraer was one of the first case studies I published. The company was an example of what business schools’ faculty would call “reverse outsourcing.” While western companies outsource manufacturing to emerging markets, Embraer would design and assemble the planes in São José dos Campos, close to São Paulo, and outsource the manufacturing of parts to Europe and the U.S.

The complex value chain worked extremely well. Embraer’s reverse outsourcing was taught in business schools, and my MBA students visiting the manufacturing facility would marvel at the technological might of this great Brazilian company. It was also an example of a worldclass innovation eco-system with the Instituto Tecnológico de Aeronáutica (ITA), one of the best aeronautical engineering schools, suppliers, and research centers.

Embraer was a prime example of a technological leader that could help an economy leapfrog thank to its research strengths and technological excellence. Furthermore, it was a success within the privatization wave of the ‘90s. While Latin Americans were not always happy with the services provided by privatized companies, Embraer was seen as a success, having become lean, efficient and profitable after privatization.

Today, Embraer is the jewel in the crown of Brazilian manufacturing and, after Boeing and Airbus, the third largest manufacturer of civil aircraft.

In the U.S., and under the tenure of President Trump, there has been an increased scrutiny regarding Mergers and Acquisitions activity. The Committee on Foreign Investment in the U.S. (CFIUS), the entity that assesses the national security implications of foreign investments in the country, is imposing limitations on how much foreign investment is permitted in certain industries, including defense and the defense-related space.

Three major technology acquisitions have been stopped by the agency in the last year. The CFIUS has the mandate to scrutinize companies and determine those that should not be sold, as they are strategic assets for the country because of positive technological spillovers and the creation of jobs. This new paradigm has spread to Europe as well.

In July 2018, Boeing announced its intention to acquire 80% of Embraer’s commercial aircraft division for $3.8 billion. The price seemed a bargain. Subsequently, the offer was sweetened in December to $4.2 billion. In recent weeks we have seen a Brazilian judge issuing injunctions, which are then overturned, to stop the deal. The government still holds the veto power through a golden share.

It is not hard to imagine how the U.S. or Europe would react if a foreign company were to make an offer for Airbus or Boeing. In comparison, Embraer is more strategic for Brazil, as the presence of cutting edge technology companies is scarce both in the country and the region.

At this particular moment, during which Brazil’s economy seems to be moving to positive growth, Embraer’s shareholders and the government need to be brave and look beyond the short-term increase in shareholder value. Is Embraer a strategic asset, essential for creating an innovative Brazil, and for the country to occupy the place it deserves among the most advanced in the world? In a world where competitiveness and growth is increasingly driven by the ability to create and leverage technology, Embraer is a unique source of leverage and strength for the future of Brazil. LT


LOURDES CASANOVA, senior lecturer and director, Emerging Markets Institute, Cornell Johnson College of Business, Cornell University.

[email protected]

This opinion piece was published in the Sustainability issue of Latin Trade, first quarter 2019.


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