When Embraer was privatised it shed some gifted staff who now form the nucleus of Brazil's SME sector
Urbano Araujo is a director of Grauna - a component maker with 500 employees based near Embraer's factory in São José dos Campos- and typical of an emerging generation of Brazilian aerospace entrepreneurs. Like most owners of small and medium-size enterprises (SME) in the country, he used to work for what is now his biggest customer. When Embraer downsized in preparation for privatisation in the early 1990s, it gifted the nascent Brazilian SME sector a cohort of talented managers, marketeers and senior engineers keen to strike out on their own. They had the promise of contracts and financial backing for purchasing raw materials from their former employer, and the ability to recruit from a pool of ex-Embraer employees.
With Embraer currently soaring high, the supply base is prospering. But, for most, the decade or so of independence has been a white-knuckle ride. At first, a flurry of new programmes promised much as Embraer began to push work down the supply chain. However, when orders nosedived after 9/11, many precariously financed SMEs flirted with disaster. Grauna, set up by Araujo and three others in the early 1990s, had invested in new equipment and taken on staff to support the manufacturer's production target of 16 to 20 aircraft each month. "Then Embraer called us in October [1991] to show us their new plan - for six aircraft a month," he recalls.
Grauna - which specialises in milling components - had already planned to offer its services to the wider world. In the late 1990s, with 10 other small Embraer suppliers in the area around Sao Jose, Araujo helped set up the consortium High Technology Aeronautics (HTA) to jointly bid for contracts from overseas manufacturers. HTA made its public debut with a stand at the Paris air show in 2001 (see box). The shock treatment of later that year meant Grauna and the other HTA companies had to "try to sell to the world", he says. "But it wasn't easy. We had a meeting with one guy in France who told us: 'I have nothing, so how can I give you anything?'."
However, resurgence in the industry has begun to bring in business for Grauna in the past three years. It won military contracts based on offset programmes for Brazil's EADS Casa C-295s and Lockheed P-3 Orion upgrades. But it was the launch of the Embraer Phenom 100 and 300 very-light and light-jet programmes that really provided the jumpstart. In 2004, after attending a seminar hosted by Pratt & Whitney Canada in Brazil, Grauna was chosen as a primary contractor for the PW600 engine that will power those aircraft and the Cessna Citation Mustang, among others.
The company is still dependent on Embraer for more than 80% of its revenues of $13.5 million, but, with a 10-year deal from the Canadian engine maker, Araujo predicts P&WC's share will rise from 15% to one-third by 2010. Now, he says, Grauna is entering "our fourth stage of development". Two years ago it merged with two other companies and, with funds from a venture capital group, is to invest $10 million in heat-treatment and CNC welding equipment.
The biggest threat to the company, he says, is lack of capital - Embraer pays for its own raw material (which accounts for Grauna's deceptively low revenues) - and Asia's low-cost manufacturers. "Our advantage is experience," he says. "We have very low costs, but we are working hard to bring investment to Brazil because in 10 years competition will be so big from India and China."
Crucial to success
Brazil has about 70 aerospace SMEs, employing 3,000 people, and encouraging them to become more proficient and competitive is crucial to the future success of the sector, says Walter Bartels, president of Brazilian aerospace association, the AAIB. The AAIB has been working with the state investment bank in São Paulo state, where most aerospace companies are based, to provide funding to allow SMEs to group together to form clusters that can jointly compete for contracts from global manufacturers. "We are trying to upgrade SMEs to allow them to jump up the supply chain," he says. At the moment, most of these companies are poorly financed, with customers such as Embraer buying their raw materials. "They are really just supplying services rather than products, so it is simple outsourcing at the moment," says Bartels. "We must solve that problem. There is a lack of money to invest so we are working with the bank to support these companies."
Attracting tier one manufacturers to Brazil is another objective. Latécoère of France, Liebherr of Germany and Safran are among a handful of overseas players that have set up in the country, mostly, although not exclusively, through joint ventures. The UK's Rolls-Royce is probably the oldest direct investor in Brazil, establishing an overhaul and repair facility in São Paulo in 1959 to support a campaign to sell flag carrier Varig Conway engines for its Boeing 707s. Until recently, the factory has focused on the South American market, with local carriers as well as the Brazilian and other regional militaries big customers. However, the growth of the AE3007, which powers the smaller Embraer regional jets, has seen an increase in business from US and European airlines in the past three years, mostly under R-R's Total Care service contracts, says head of customer business Fernando Quental. Today, the factory's business is about 70% civil, with Asian AE3007 operators top of the target list. "The Rolls-Royce joint ventures in Asia concentrate on big fans, so we don't compete," says Quental. The operation also supports the Tay engine as well as the R-R 250 and Turbomeca Arriel turboshafts.
One Brazilian SME that believes it is well positioned to leap up the supply chain is Geometra, a design consultancy with just 12 employees that started in 1998 and which has ambitions to be "the second aircraft manufacturer in Brazil", according to its president (and ex-Embraer manager) Luiz Paulo Junqueira. The company - which markets itself as offering "total management of a project from conception to certification and serialisation" - designed the wing for the (now stalled) Eviation Vantage and is in talks with US Aircraft of Akron, Ohio, developer of the A-67 Dragon. Its specialisms include landing-gear design and engineering analysis and simulation.
"We offer a single channel solution to manufacturers coming to Brazil," says Junqueira. "Our philosophy is to take on project management and contract-out manufacturing. We have a lot of experience in-house, but can outsource what we need and instantly scale our capacity up to 500 employees." Junqueira says Geometra will shortly "initiate our export drive" through a contract with a "first-tier Boeing supplier".
Thanks to Embraer, Brazil can market itself as the biggest aerospace nation in the southern hemisphere, ahead of Australia and South Africa. But its still relatively young supplier network needs to find its feet in the wider world and lessen its dependence on the national champion. Bartels insists Brazil is "very competitive globally" through a mix of aerospace experience and labour rates as little as one-third of those in Europe and North America. He also maintains Brazil can hold its own against Mexico, Latin America's other fast-emerging choice for aerospace outsourcing, which offers the logistical advantage of neighbouring the USA. But attracting investment from the northern hemisphere is key. "We are very open to international co-operation," says Bartels.
Source: Flight International
