Embraer chief executive Mauricio Botelho will arrive back home in Brazil from Asia this week a happy man. Barely 10 days after trimming aircraft delivery forecasts for 2002 as a result of the continued depressed state of the market, Botelho signed a ground-breaking deal on 2 December in Beijing, covering the licence-production of ERJ-145s in China.
Clearly, Botelho sees the Chinese production deal as a coup against Canadian rival Bombardier in a market regarded by both as having enormous sales potential. Botelho has been at the helm of Embraer for seven years and, since the early days of its privatisation, has brought it into profit, overseeing the expansion of the regional jet product line from the single 50-seater to two families covering the 30- to 110-seat sectors.
Bombardier holds a clear lead over its rival in China - more than 40 of its regional jet, turboprop and business jet aircraft are operating in the country, against just five ERJ-145s flying with Sichuan Airlines. But Botelho sees a bright future for the Chinese venture, formally known as Harbin Embraer Aircraft Industry, and he expects it to lead to many more orders in one of the few markets where sales projections remain bullish.
As a result of the deal, Embraer is opening new talks with Chinese airlines on the sale of ERJ-145s, as it is expected to clear the way for long-delayed agreements to win government approval.
The formation of the joint venture with state-owned manufacturing giant China Aviation Industry Corporation II (AVIC II) also comes as Embraer enjoys Asian sales successes in India and Thailand, and as it is entering into potentially large competitions in Japan.
"We see very strong demand for our products in China," says Botelho. The joint-venture agreement leaves Embraer with 51% ownership, and its Chinese partners with 49%. The first ERJ-145 is expected to be rolled off the assembly line in Harbin in December next year. Initially, one aircraft will be produced a month.
Botelho says: "The move is "a real strategic approach - there is no guarantee on anything. But what we have tried to do here is not just a marketing issue. It is a solid relationship that will be here for years to come and it is beneficial for the two countries."
Botelho says Embraer should benefit from having a local production capability, as airlines will not have to pay excessive import tariffs. Late in 2000, the Chinese government significantly increased import tariffs and value-added taxes on aircraft with a structural weight of less than 25,000kg (55,000lb) to 23% from 7%, making it all but impossible for Bombardier and Embraer to secure new sales commitments from the country's airlines.
At least some of these taxes will now be avoided by Embraer's Chinese unit. "As a Chinese company - which this company will be - we intend to take all the benefits that every Chinese company is entitled to," says Botelho.
The Civil Aviation Administration of China and other government agencies began calling three years ago for the country's carriers aggressively to add regional jets to help build a US-style "hub-and-spoke" route network. But after initially approving a handful of orders, several potential deals struck with airlines by Bombardier, Embraer and now-insolvent Fairchild Dornier were held up by the carriers' failure to secure final regulatory approvals.
Some observers speculated that the government has been delaying approvals because the country's manufacturers have been seeking to develop regional jets of their own. AVIC II had for some time been looking for a partner to help build aircraft in China, while fellow manufacturing giant AVIC I is seeking to develop a 70-seat-plus regional jet aircraft of its own, dubbed the ARJ.
Embraer signed conditional deals with China Southern Airlines and Wuhan Airlines covering ERJ-145 purchases nearly two years ago, but they were held up by a lack of final government approvals. Many observers believe the delays are linked to Chinese industry's plans to build aircraft in the country.
Botelho says the tentative China Southern agreement, which covered 20 aircraft on firm order and 10 options, and the Wuhan agreement, which covered 10 firm orders, have both "lost their validity". But with the production deal now finalised, Embraer will be seeking new talks with the two carriers.
"If they required those aircraft at that time, they need them now," says Botelho, who stresses that Embraer is not just looking for sales with these two airlines. "We have many other potential customers in China," he adds.
Embraer forecasts demand over the next 20 years in the Chinese market for aircraft seating between 30 and 110 passengers to be around 500. About 250-300 of these aircraft are expected to be required within 10 years.
While Bombardier has said it identifies far more demand in China for aircraft seating 70 or more passengers than for 50-seaters, Botelho says that "it is a 50-seat market as well as a bigger-aircraft market".
He says that Harbin Embraer Aircraft Industry will focus sales efforts primarily on the Chinese market, although if it makes economic sense to export regional jets built in Harbin, the company will do so.
"We will be focusing on the Chinese market, but if it is more competitive delivering the aircraft from China than from Brazil we can do so," he says. "If we get a sale in Mongolia, for example, it may be better for us to produce the aircraft in China."
Source: Flight International
