Odd Lots - How Brazil Gave Birth to One of the World's Greatest Jet Makers

Episode Date: July 4, 2024

There aren't many advanced manufacturing success stories in Latin America. And globally, there aren't many companies that can build commercial planes at scale. Yet somehow, one of the world's leading jet makers is Brazilian. Embraer is the third largest maker of commercial planes worldwide after Boeing and Airbus. On this episode, we talk about how the company came to be, what its opportunities are, and what lessons in economic development we can learn from its rise. We speak with two guests for the show. First, is Richard Aboulafia, a managing director at AeroDynamic Advisory, to understand the company's role in the aviation ecosystem. Then we speak with Juan David Rojas, a writer on Latin America, to understand the political conditions in Brazilian history that allowed the company to emerge and thrive.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the Odd Lots podcast on Amazon Music. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, this is it. This is your long-awaited Amber Air episode. We're finally doing it. There are certain episodes. we talk forever about doing that we never do. The Jones Act.

The Dredge Act. Oh, no, we did do a Dredge Act episode. The Jones Act being the big one. The other one is we've never done it. You know, the Dredge Act episode was like a shadow Jones Act episode. True, because it's probably said we've never done an Onion Futures episode. But at long last, we're going to be talking about Embraer. Yeah, and this is such an interesting company.

I know we've brought it up a few times before. But the thing about it is when you think about aerospace, and the layout of that particular industry, you usually think Boeing versus Airbus. And we've certainly talked recently about the competition between those two companies. They are the two biggest airplane manufacturers, aerospace manufacturers. But there's a third one. Comac. Not quite yet.

There's a third one. And it is a lot smaller than Boeing and Airbus. But the fact that it exists at all is kind of phenomenal. think a lot of people would have expected that the world's third biggest aircraft manufacturer is in Brazil. That's exactly right. Because for one thing, A, you never hear about them. B, generally speaking, there are not many Latin American successfully global advanced manufacturing companies, period. There are other big Latin American companies, obviously, but not in manufacturing. Most of them have to do with agriculture or commodity exports. Yeah. So, yes, it's a

very unlikely story, the fact that this company exists at all. And it's not just that they exist. Because the first time that they came up on the show, it was in the context of a conversation about the troubles of Boeing, they're really good. They're really respected in the industry. Very well regarded. They make high quality products. They're in demand from carriers all over the world. And so it's not just that it exists. It's not just that it's from Latam. At least in its niche, it's considered to be one of the best in the world. Absolutely. And so I think it's a worthwhile subject to explore. How did Ember Air come into being? What is its product offering? What is the appeal? You know, it's a global market. How has it managed to make inroads there?

And what, if anything, it says about industrial policy and current efforts to develop technologically advanced industries? This is the key thing. Because we talk a lot about about industrial policy right now in part because the United States and also to some extent Europe were in the midst of this sort of industrial policy fever and there's this enthusiasm for spending money and there's this enthusiasm for re-industrializing and building up at least some capacity in certain critical things, whether it's electric vehicles, whether it's batteries, whether it's solar panels, whatever it is. So I think it's important to sort of have an understanding of prior waves of industrial policy because all governments from time to time want to build their own

champions or want to be less reliant on some other country that they import from. And so it's really good to sort of get an understanding of some of the success stories and what actually happened. Absolutely. All right. So this is a special episode, which means we have two guests to talk about this. We're going to start with someone who's been on the podcast before. Richard Abulafia is, of course, the managing director over at Aerodynamic Advisory, and we're going to start with him. Richard, thank you so much for coming back on all thoughts. Oh, it's a real pleasure. Thanks for having me on. So when I think about the landscape of aerospace, I mostly think about Boeing and Airbus, but of course, there is a third, and it happens to be Embraer.

Yes, that's right. The much smaller, but very, very impressive. and, you know, deeply influential company of Embraeer. So what is this company? What do they make? And when you say impressive, what do you mean by that? Well, the fact that they were created and were able to deliver aircraft that the market wanted and have been through multiple different incarnations over the years, a respected provider of aircraft to both airlines, business aviation customers, and even military customers.

it's pretty remarkable when you think about it, given the very high barriers to entry in this business. So one thing I always hear when we start talking about Embraer and how did it manage to become the third biggest airplane producer in the world, a lot of people will bring up this idea of specialization or having some sort of niche in the market, some sort of focus. And for Embraer, it's the business jet, right? Like that's kind of what they're known for. A lot of people consider them the gold standard in smaller business or regional jets. How did that specialization come to be? Well, you know, their real breakthrough was in scheduled air transport, first with turboprop regional aircraft, then with regional jet regional aircraft. After a couple decades of doing that, they realized

that the business aviation industry was actually quite right for them to enter. And indeed, the profit margins typically are higher in the business jet industry. What they did was basically a form of arbitrage, they recognized that the margins they'd enjoy in business aircraft would be higher than regional, but maybe perhaps a little bit lower than the traditional business jet companies like Cessna or Ocker Beachcraft or Bombardier. So therefore, if they were aggressive about pricing, their margins would go up, but they could still get into that business aviation market. And to this day, business aviation has been effectively constituted as the third leg of Embraer. The first original was sort of on the military side, then the big breakthrough scheduled air

transports and now also business aviation. So you mentioned smaller regional commercial plans. So just to be clear, they don't have like a big wide body like Boeing and Airbus do. They don't really have a big wide body at all. And they don't even have a proper narrow body, unfortunately. And the entire airline world would love them to develop a traditional mainline narrow body at this point. Matter of fact, I think they're crying out for it because Boeing is stumbling very badly as the second player. Airbus is doing great, but they've got backlogs that are 10 years long,

so get mine and eventually you'll get your jet. People are crying for Embraeer to do something bigger than the kind of large regional jets that they've been doing. The 190-195 E2 series is kind of right on that border between a regional jet and mainland jet, but it can't do, say, Transcon, U.S. or something that a 737 max or an A320 Neo can do routinely. But boy, would airlines love them to develop a new product that did that? How is it that a Brazilian company is in a position where the world's aviation market or airlines are crying out for it to develop a narrow body? Because in some respects, you know, we have national aerospace companies in other places. So the last time we had you on the podcast, we talked about Comac for a little bit,

In Russia, there's Tupolev, and I can't remember the other one. I think it starts with an S. But those haven't really broken out of their local markets in the way that Ember Air has. How have they managed to do that? Well, you've got to go back to the, I don't want to say those great old days because they weren't great, but everyone thought, gee, we should carve a factory in the jungle and build our own cars, aircraft computers, whatever else. And so many people tried that.

There were some cruelly spectacular failures in Latin America. You had FMA in Argentina, Nair and Chile. In Indonesia, you had IPTN. Lots of people had that idea. The Japanese tried it. Lots of people. And the Chinese and Russians have been sort of screwing around with it for some time also. Embraer could have easily gone down that path of failure.

But a couple of things happened. One, they hit Patriot with a couple of key products. Most notably, the Embraer 120. which was a turboprop transport that really proved quite popular in North America back in the 1980s. And after that, rather than basically continue on that government-owned government hobby shop that they had been on and others had been on, they decided to privatize. And they did that extremely successfully in the 90s. And then on top of that, they continued that engineering-driven culture. They had a lot of their people who came from a school that they and the government kind of,

co-owned that basically proved a terrific farm for engineers and executives going into the aerospace business, ITA, I believe. And this culture has prevailed to this day, despite privatization. They've managed to come up with a very happy combination of government-driven industrial policy transformed into something that is sustainable and profitable. I'm going to ask a really big zoom-out question because I realize I'm very ignorant of this and I like, oh, there's a big plane that's a wide body, and then there's a less big plane, and I called a narrow body, but maybe it's not technically a narrow body. I realize I actually don't know any of this.

Perhaps there are some listeners who are the same. Can you talk about actually just define some of the key segments of the commercial aviation business broadly? And then with Ember Air and the markets they compete in, what do we talk about in terms of market share? Yeah. First of all, commercial jet transport. That, of course, is general travel. and that has three flavors. One is a wide body, which is typically for intercontinental, international routes,

and it's very simply you get on board, and there are two aisles rather than one. Only Airbus and Boeing do those. China would like to get into that. The only country in the world outside the U.S. that ever did its own was the old Soviet Union. Europe only did it by pooling their resources and creating Airbus. Then you've got narrow bodies, which are basically for mainline jet operations, single aisle in the middle, typically starting at about 120, 130 passengers, and a minimum of, say, 3,000 nautical miles or something like that. Then you've got regional jets, which look kind of like small, shrunken, narrow bodies that just don't have the reins.

They typically max out at maybe 1,500 autical miles and typically about 120 people, so they're a notch below. And Emperiere has produced either the very smallest narrow bodies or the very biggest regional jets you can probably. possibly find it or create, and they've done incredibly well with them. Like, wow, that's a really quality product. But they simply don't satisfy the requirements for airlines that want to do traditional mainline transcon routes with a sufficient number of sites. Think Southwest, for example, you know, the smallest Southwest plane is just slightly bigger and more capable than the biggest embryo aircraft. In terms of military, you know, they were originally created effectively, is, to put it gently, kind of a hobby shop for the fascist, Honta, in Brazil, circa, you know, 60, 70 years ago.

So they did basic military self-sufficiency sort of stuff. But they've evolved, and it produced some pretty impressive aircraft. And right now they're co-producing Greek and fighter jets designed by Assad for the Brazilian Air Force. Most impressively, they've created this remarkable military transport, the KC390, which can also do air-to-air refueling. for the Brazilian Air Force and for export customers, it's a remarkable creation, typically for Embraher designed on time and on budget. So that just goes to show what they can do. And then finally, the third leg business aircraft, individual owners and operators,

fractional share providers, anybody who's catering to wealthy people and wealthy companies that want their own form of private travel. I'm June Grasso, inviting you to join me for the Bloomberg Law Podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets. From corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines.

We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. Joe, I always like looking at the regional jets because you get some weird. And you got some weird branding choices too. So I remember I was on, I guess it must have been like Austrian Airlines and it was a dash 8 from De Havilland. So a little turbo prop and on the

engine they had written in cursive the sounds of silence. And that was the branding for the engine. And I remember sitting there about to take off just thinking like silence is not the thing you want to hear when you're on a turbo prop soaring above the mountains. Yeah, a little macab maybe, a little... Yeah, there's also, there's a kind of weird Bombardier. I don't even know if this would count as a regional jet, because I think it's for military use, but it has like this really weird nose, if you look it up.

It's like the... Yeah, the Bombardier, CRJC and others have converted to various military uses. What's interesting is that Bombardier was originally the third biggest airframer, and they kind of mostly died. They're now the world's only pure play publicly created business jet prime. Everything else has been sold off after they kind of bet the company on something that cost way too much.

So Embraeer was left with the keys to the kingdom. In terms of market share, they've got 100% of the regional jet market, a great place to be. And a perfectly respectable single digit percentage of the business aircraft market. They really have 100% in that regional. So we're talking about the U.S. or where? 100%. That sounds crazy. There's no one else competing with them in regional jets. Nominally, the Chinese are building the ARJ21 for Chinese customers.

Not sure I'd count it, but if you did, you know, it would be 90-10 or whatever. That's crazy. So I remember you just jogged my memory, Richard, but when I was covering airlines in like Circa 2008, I remember writing Bombardier headlines all the time. And then they just kind of like, yeah, disappeared. It was something in like 2015. I remember when I just joined Bloomberg and there was a bunch of stuff, what happened with them? Because I remember like the headlines about were they going to be saved or bought or bailed out or something.

Yeah, that's right. And basically they decided to make that leap into narrow bodies. They developed or tried to develop something called the C-Series, which was exactly in that low-end airbus and Boeing class. And they bit off more than they could chew. They counted on the Canadian government and the Quebec government, provincial government, bailing them out, which to a certain extent worked, but boy, they just kept needing money. And it became a giant money pit. And eventually they had to pay Airbus to take this jet off their hands.

So they could say, oh, please, let us at least, you know, salvage something from this terrible experience. And now it's known as the Airbus A-220 is a good jet. But Bombardier was forced to sell off everything, including its regional jet division, which the Japanese bought to no purpose or end. And all Bombardier does now is business jets. Thankfully, they do them very well and it's a good company, but they've exited everything else. So going back to the sort of 1970s, 1960s aspect of all of this, so you laid out very clearly

the idea that there were a lot of different countries that had national champions in terms of aerospace companies. Everyone's trying to make their own car or make their own plane or whatever. And when I think about that time, I think. about protectionism for some of those industries as well. And so I guess the thing I'm wondering is how did a company like Embraer get a foothold in the U.S.? Was there some sort of like deregulation or liberalization of the market that allowed it to get in there?

Yeah. This is absolutely a key thing to explore. And it's something unique to the aircraft industry that you can't really do autarky. A lot of the theories of Latin American and other emerging country developments revolve all around autarky, our own cement, our own whatever. You can't do that with aircraft. You just can't because 70, 80 percent of the value of an aircraft is in extremely technical parts. You know, you might be able to do your own aircraft. Good luck doing your own turbine engine or your own avionic system or your own auxiliary power unit or whatever else. That's all coming from

somebody else. And they recognized that and they said, you know, again, great management. They said, oh, we have to be a systems integrator like Dell computer. Okay. And And I think sometime in the early 90s, Jeffrey Sachs, the economists made the great observation. They're Brazil's greatest exporter. They're also one of their biggest importers. They have to. That's the way it works. So one of the other striking things is they have this dominant market share in specific categories.

It's impressive. It's profitable, which is, you know, not always a given. It's also very small from a market cap standpoint. It's just a $5 billion company. Boeing is $109 billion. our company so it could lose $5 billion in market cap on a random Monday with like a bad headline. What is the constraint there? Is it not really been optimized? These just not that big markets that it's playing in, even if it has dominant share, is it not that profitable? Has it not been run?

I mean, arguably one of the challenges or one of the complaints leveled at Boeing, it's, you know, it's been run too aggressively to make profits at the cost of reliable planes. Is there a situation kind of the opposite, where it's been less sort of focused on creating shareholder value? You know, it's just really hard to break out of their swim lanes. They developed a couple of business jets, four of them, to be exact, that are really great business jets, but you have to have more than that to achieve critical mass. Similarly, regional jets, you know, the three buckets in scheduled air transport, regional jets are like maybe 5% of the whole business. So it's really tough.

tough to break out of that. And of course, their military share, well, the military market's unbelievably fragmented. So no matter how good you are, you're not going to build an F-35 fighter jet, and you're just going to have a tiny, tiny share. So they're very well run. They tend to be a bit conservative. That is true. And here we are today where all the world's airlines love them and trust them and want them to develop a jet that would compete with Airbus and Boeing. But it's really tough to make that leap. Why for reticence? Yeah. Well, give you an idea. Yeah, when Maritier bet the company on that C-Series, I mentioned before, they were a $20 billion a year company.

So imagine if you're a $5 or $6 billion company and you're asked to make that giant investment in a narrow body aircraft, you'd better have some very deep-pocketed partners helping you to do that. And maybe they'll line those up, but the idea of doing it on their own, that's like asking one of us to go and win the Nobel Prize in physics. It's just a big, you know, it's just really hard. How much synergy is there between building a regional jet versus like the next level up, a narrow body?

Like, is it just a matter of, you know, taking all the components and... Spreading them out a little bit. Yeah, increasing them by 20% or something like that. Or what's actually the difference in terms of engineering? Yeah, that's a great question. It's really financial bandwidth. In terms of skill set, very similar. Good program management and great connections between the people at the top.

is what's gone wrong at Boeing. The connections between the people at the top and the people engaged in the company's core business of designing and building planes, it's gone horribly wrong. At Embrere, no, they're pretty darn good. So good program management, good company management, good systems engineering, good systems integration. They're great at all of us. The KC390 most effectively illustrates that, that new military transport they've done. What we're just talking about What is that as you get bigger in size class, oh boy, the requirement for cash grows exponentially. So that C-Series total spend at the end of the day, about $7 billion, maybe $8 billion in today's money. You know, back then, four or five, almost broke the company.

Really, really hard to get. And that was something that was smaller that I think that Embraeer would like to do. Embraer, I think, would love to do a 180 or 200-seat jet. they're going to need something on the order of $11, $12 billion in today's money, and that's just not going to come from a $5 billion a year in revenue company. I'm sort of realizing, Tracy, because, you know, my first question is like, oh, what's so impressive about this company? And the answer is the fact that they can make airplanes at all consistently puts them

in such a narrow company that almost by definition, it is impressive. Do you think at some point they will, or is it just they will try to, like, level up to a, another scale and compete in a new market? Or is that risk of just sort of betting the whole house on a new thing and not being able to sure you can do it? Just like too inherently risky for a company this size. Yeah, they just aren't going to do it on their own. It's just physically not possible. Again, for the same reason, I won't get that nuclear physics prize any times in. However, what is sort of intriguing is there are game changers out there. You've got these very large U.S. defense primes that might be looking to diversify into adjacencies.

And some of them are systems providers, too, like an RTX or a G or even in Northrop Cremant on the pureplay defense side. Maybe someone would say, hey, this is an intriguing possibility. But then even more intriguing, you've got these economies in the Arab Gulf, Saudi Arabia, and the UAE, looking to diversify with vast oil revenue. Maybe they could work with Embraer and say, hey, this is intriguing. Now, the problem is, of course, what's in it for them? How do you have this great culture of engineering in Brazil and somehow migrate that to Riyadh or something? That's really super tricky.

And the track record of aircraft companies working with people who have money and want to get into it, it's not a great track record. Taiwan and McDonald-Douglas tried that three decades ago. It didn't go so good. But you can't rule it out. And the amount of money that's sloshing around in the oil states is, it wouldn't even move the needle if they were to say, here's 12 billion, let's build a jet. You wouldn't even show up, it wouldn't even show up in their balance sheet.

It's walking around money. Maybe SoftBank can give them like $50 billion or something. Why not? Exactly. Be better than going into some new SaaS company. Okay. I have just one more question. And this is something that I read a number of times when I was researching what makes

Embraer special. And people kept saying it's also ease of the mechanics. So the idea that it can be fixed up pretty quickly and pretty simply, and that's probably important if it's a smaller jet that's going into smaller airports or more far-flung locations where resources are more limited. And I guess my question is, A, is that true? And then B, how do you achieve that? Because my assumption would have been that every aerospace manufacturer in the world would be trying to create a problem-free aircraft that doesn't need a lot of work on it. And I'll just add a quick C on to Tracy's question, but do the constraints of having to operate in a country like Brazil or regional areas like that, do they have a forcing effect on achieving that result of simplicity and ease of prioritizing things like ease of repair, stuff like that? When you go back to the origins of the company when they were designing planes like the Embraer 110 Bandirante and other planes, you know, some agricultural aircraft, they were all too mindful of the rather difficult operating.

circumstances of a developing country like Brazil back then. And they've had that mindset ever since. Now, are regional jets for a member air, business jets from embryo more maintainable than others? Not really, but what they have gotten as a consequence of that experience is an awareness of the importance of good product support. And it takes that background, that experience to realize that. Like right now, you know, you've got everyone talking about Comac and China. Yes, excuse me, you need a worldwide global support infrastructure before we even talk about exports. And they're like, we need what now? And that is one of the very biggest barriers to entry.

And because of Embraeer's origins, recognizing the importance of maintainability, they've always emphasized that. They've always been really good about it. So since World War II, there's exactly been one country and one company that has successfully entered the industry of building commercial airliners, and that's Embraer. That's incredible. Maybe the Chinese are almost there. Maybe we don't quite know. They certainly haven't done so on an export basis the way Embraer has. But in the historical context of everyone trying to get into this industry and everybody failing, Embraer stands out as a remarkable success story.

Richard, thank you so much for coming back on the show. That was fantastic. No, it's my pleasure. Thank you. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations.

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Listen to the latest from Bloomberg News Now on Apple, Spotify or anywhere you listen. That was our conversation with Richard Abu Lafie about the extraordinary success of Ember Air. But we want to understand more about where this company came from and the sort of political and economic environment in Brazil out from which it emerged. So we're going to be speaking with Juan David Rojas. He is a columnist on Latam issues at Compact Magazine as well as a contributor to American Affairs. So, Juan, thank you so much for coming on the podcast. Thanks for having me on. I'm a big fan of the show.

Thank you so much. So we had the conversation with Richard. We sort of got a rough outline of the history of Emberraera is founded in Brazil in 1969. What was going on in Brazil economically or politically, and maybe perhaps even across Latam, such that the country felt it necessary to have some sort of homegrown aviation company? So between the 1930s and the 1980s or so in Brazil and across most of Latin America, but in Brazil starting with the government of Gertullio Vargas, you had consecutive administrations from across the ideological spectrum, both Democratic and authoritarian Vargas is actually a great figure to look into there,

but they promoted what were called ISI policies, import, substitution, industrialization. And in a nutshell, what that means is they use protectionist measures, tariffs, subsidies, the like to both block the import of industrial goods and foster the development of those same products domestically. And this is actually what we've seen Brazil do just weeks ago, along with a number of other countries, Mexico, the EU, US, raising tariffs against Chinese EVs and solar panels. So the idea is that, you know, we want to develop our own EV industry. We can't compete with China as such right now. We don't want to import their goods. Now, in Latin America, ISI policies get a bit of bad rap with some good reason, but they really shouldn't. Why? Today, in Brazil, of its 20 largest

companies, half either were now, or at one point worse, they don't. These are, you know, Petrobras, Bali, CSN, Electrobras, and of course, Embraier. In each of these cases, it took decades and loads of failures before any of these companies became profitable. That's just industrial policy 101. Depending on the industry in question, there's learning curves where failure necessarily contributes to long-term success. And what's sad is that around the time that Embraed was created right in the middle of the ISI period, Brazil was something of an industrial powerhouse in the region, specifically in auto manufacturing.

Again, a lot of these companies weren't necessarily profitable, and there were ambiguous failures which was in like nuclear power on computers in Brazil, for example. But they were high-value sectors that contributed to huge gains, both in productivity and GDP growth. For perspective, average GDP growth in Brazil during the ISI period, it was around 5% a year, and since the 80s, 90s, it's been around 2% with productivity being stagnant. And, you know, this makes a lot of sense because what we've seen since the 90s is that Brazil's economy has really transitioned towards mining and agriculture versus manufacturing, which manufacturing inherently is more beneficial towards productivity growth. You know, starting in the 90s,

industrial policy became kind of a byword for cronyism and inefficiency. And you haven't really seen efforts in Brazil to develop high value sectors in new industries where economies of scale are important like aviation. Of the companies I mentioned, you know, this makes sense. What were these? You know, Petrobras, Bally, et cetera. They're all in mining hydrocarbons. Ironically, still thanks to past industrial policy, which isn't to say that privatization in some of these cases was useful. But Embraead really is the outlier here and that it's a aviation manufacturing room. So can I ask you to dive a little bit more into the political atmosphere when Embraer was created? Because my understanding is that, okay, it had some roots in the 1940s and the 1950s, but it wasn't until 1969, as Joe mentioned, that it was really crystallized into a company.

and of course Brazil in 1969 was undergoing a lot of political change. And sometimes when people talk about industrial policy, there is an implication or a connotation that in order to have very fast industrial development, sometimes you need a command economy or a dictatorship of some sort. And that was sort of, my understanding is that was kind of the background in 1969. Yeah, that's exactly right. It's a really interesting point. It was a 20-year military dictatorship when Brazil took power in 1964, left power in 1985.

They actually created Embraer because in the decades up to that point, the past governments tried to promote aviation solely in the private sector, and it didn't really work. Actually, interestingly, from the beginning, Embraer was a mixed private public enterprise with the government holding only a 51% stake. And Brazil's military dictatorship was also interested. and that unlike Pinochet's dictatorship or the last military dictatorship in Argentina, they had more of a developmentalist been, whereas, you know, the ideas of the Chicago boys were more prominent in Argentina during the 70s and 80s in Chile as well. But importantly, with Embraer in Aviation's Brazil, there was a concerted and consistent effort over decades to really develop the company in aviation.

Richard mentioned the CTA, and I want to say a lot. little bit on that they did this right and that they laid the groundwork through the CTA and R. What's the CTA? In the translation, it's like technical aerospace center. And it was modeled after, yeah, they was modeled after MIT. They actually brought an MIT professor Richard Smith and they developed all of these research institutes that would focus on developing different designs for different planes and the like. and actually produced one of Embrae's founders and longtime CEO, Zidi Silva.

And this is a guy I want to mention because he's just incredible. He was both a pilot and an aerospace engineer. He actually worked on the prototype for the Band Eanji, which was Embraer's flagship program since its inception. Actually, funny story, he left after like 86 and then came back once the company was privatized. But he was flying a shingu, which was actually a. a jet that unfortunately failed. But he was on his way back from Brasilia with President Sarnay to Sojouz de de de Campos. And he reportedly was one of the first people to see Brazil's 1986 UFO incident.

There were like 20 flashing lights all around Sojus et du Campos, and it's famous in like UFO lore, but it's just kind of funny. He was one of the first people to see it. I never heard the 1986 Brazilian UFO incident. May 1980's series of radar and visual contacts. This is going to establish a new precedent of all all thoughts guests must come prepared with one piece of UFO war. Yes. Wow.

That's crazy. Yeah. It really happened, huh? Okay. I'm a believer in. Just to stay on the politics, the military dictatorships are not that uncommon from time to time around the world, particularly not that uncommon. at various times in the 20th century in Latin America. But I hadn't really thought about that,

that you do get sort of different flavors of them from an ideological perspective. So it's interesting, as you say, Chile's sort of famously bringing in people to give advice from the University of Chicago, somewhat infamous than, I suppose. But it's interesting, as you said, your point, maybe you can expand on that, that the Brazilian one had a very different attitude

towards domestic economic development. Yeah, you know, I'll step back a second. If we think about all the countries in Latin America where a company like Embraed would really succeed, it makes a lot of sense that Brazil would be it. It's a massive country with multiple major cities far apart, making aviation critical for both national security and commercial purposes. On the latter, that benefits from economies of scale, given that Brazil has a large domestic market. There's a lot of moving parts here, but really the interming.

And you could say this about a lot of other similar companies around the world. The intermingling between the military and commercial dividends of the company, particularly in Embraer's case where exports became prominent, was critical. You know, you think about it, you need the military as a source of stable demand, given that business cycles and aviation can be really volatile. And revenue tends to be limited, especially in a country like Brazil. On the other hand, the potential for waste as a monopoly or oligopolistic, firm, depending on the state military, lends itself to the classic problem of protectionism.

At one point, the military insisted that all public sector planes had to be purchased from Embraeat and that all travel should take place on those planes. And crucially, after 64, the U.S. imposed restrictions on military aid and weapons sales, in a similar way now to Russia have forced them to rely on their own domestic industry. But the way you mitigate that potential for, you know, pronism and the law, like is by gearing your commercial operation towards exports in foreign markets, particularly if you can find a niche, which is something you guys talk with Richard about. I hadn't realized that, but it actually makes a lot of sense the idea that Brazil is a very

large country with a lot of remote areas, and so it really needs aircraft in many ways. But I guess one thing I'm kind of curious about is when Brazil was developing Emberair, what was the argument for comparative advantage if there was one? Like, was there a moment in time when people said, like, okay, we need aircraft and we can develop them in-house and lots of countries are developing their own national aerospace companies at that time? But was there a moment where they said, and will be better at it than other people? That's a really interesting question.

And it goes back to that point on finding the correct niche. it's important to keep in mind that Embraer came on to the scene very late in the history of aviation. At this point, Argentina's FMA, for example, was way ahead of Embrae to say nothing of peers and developed countries. Very astutely, the leadership of the company looked at the global landscape and said, you know what, there's no way we can compete with what's coming out of Europe and the U.S. Is there a place where we can specialize? And so, lo and behold, by the early 70s, they produced the Ipanima and shableness. Chamanchi, the first one was a small agricultural spray plane, and the second, a small jet fighter

that was designed by one of the CTA's research institutes. Then in 73, they unveiled the Bandai Nanchi, a 19-seat turbo prop plane, with around 500 models sold mostly to the Brazilian military. And almost immediately after this, the firm made the strategic decision of orienting itself towards exports and engaging with partnerships with foreign peers. When you talk about like developmentalism in Latin America, you often see the region compared to the Asian Tigers where the explanation will be that ISI policies worked in, you know, like Taiwan, South Korea, et cetera, because they geared their industries towards exports rather than just the internal market, which was more prominent in most Latin American countries

and with most firms. So you mentioned that by the time Embrae came into existence, Argentina already had an aviation company, FMA, which I'm just looking at Wikipedia right now, apparently was founded in 1927, which seems hard. Yeah, yeah, right around the time, actually. So what happened? Can you maybe give us the short compare and contrast version of why regional carriers in the U.S. are not flying on little planes made by FMA? There's a lot more history that, you know, MRARA went through a lot and saw a number of failures. But, you know, you compare it to FMA and it's just night and day. Why? And it's sad because the FMA had that advantage. They started so many decades earlier.

And this is to give you an idea. It was first created, yeah, I think, in 27 by secret decree. And as a result, if you can believe this, there are no audits or financial records from the Argentine government. And another factor that's important, too, is the fact that Brazil, you know, they had this 20-year military dictatorship, but comparatively, there was a lot more stability. That military dictatorship lasted a lot longer, and there was continuity between these dictatorial and democratic governments.

In Argentina, during the 20th century, there were, like, I think something like 30-something coups. And they had this effort during and after the Second World War in Argentina, Peron famously took in a lot of Germans from a Nazi Germany. And apparently they didn't jive well with the Argentines. I have a few good data points on here that in just five years, 55 and 60, they went through nine different directors with a maximum term of 23 months. And it was just extremely volatile.

it was just a complete disaster. And in Braheera, the difference was that they really specialize in going after these small and later regional jets. That then the regional ones took off in the 90s after the company privatized. And they ended up privatizing FMA also in the 90s, and that was a complete disaster. It was run by Lockheed, and they promised to, like, not layoffs, but some of the workers and made other promises, broke all of them. but the Argentine state still looked the other way. Going back to Emberra, can you talk to us about, I guess, its role in the overall Brazilian economy?

Because this is something I was thinking about. We did that episode with Ricardo Hausman where he was talking about how. That episode is very much in the background of my mind this whole time. Yeah, exactly. And he was talking about, you know, this idea that once a country develops one industry, it sort of leads to other industries where there are synergies or where that technological knowledge can be built upon. So I'm curious, like, were there other trees that Embrere actually led to within the Brazilian economy? The military industrial sector had a number of different firms and actually one that comes to mind right now,

unfortunately, because it runs the risk of being acquired by a foreign company Avibras, which specialized in making a number of a military. military hardware. And the CTA, it was based out of San Jose dos Campos in the state of Sao Paulo. It's kind of known as Brazil's Silicon Valley. And that actually turned into this huge industrial hub. I believe Lula actually worked out of there when he was a union leader for Brazil's metallurgy union. And but I had it as a pretty small company. It's worth only about what, like five billion dollars? And unfortunately, what was? we saw after the 90s is that a lot of Brazil's industry in manufacturing really collapsed because

of the fact that they liberalized trade and privatized a lot of these companies. Some of them did better, like Petrobras and Avali, for instance, but a lot of the indigenous auto manufacturing firms basically collapsed overnight, unfortunately. So this touches on a couple of things is what I was going to ask next. But in your view, I mean, the whole reason we're interested in Ember Air in the first place is because two things, right? The first is it's really hard to make a plane, period. And we see that in the U.S., and we see that in China.

And I guess Europe seems to be doing fine with making planes at Airbus. But objectively speaking, building a reliable commercial plane is really difficult. So that's very unlikely. And then B, there are just not many advanced manufacturers. success stories in Latin America, period, which sort of touches on the question that Tracy just asked about. So part of the question here is like, what happened such that, A, like, how is there this one company that managed to overcome two very unlikely things happening? And B, is it just a matter of premature liberalization in your view? Or like, what are the factors that cause that there

aren't more amber errors? You know, why isn't there a Brazilian B-Y-D or whatever it is? As far as why Embraer succeeded, a lot of it is luck. A lot of it is just smart investments, really good competence, and cultivating talent for this company. But as far as why there isn't a Brazilian BYU, you know, there's this automaker in Brazil, Brugel, its president was known as the Brazilian Henry Ford. And to be honest, most of the cars that this company made weren't great, but a lot of them had potential. They were actually making EBs during the 70s and 80s. There were these small little cars.

And the jeeps that they made were pretty good. Unfortunately, after they removed tariffs and allowed competition with imports in the 90s, the company went bankrupt in 1996. And we talk about premature liberalization. It's interesting because what I would argue with a company like that is that you don't want to just prop up these companies unnecessarily, especially if they're not giving results. But if there's potential there, things maybe would have been different. If, let's say, policymakers have said, you know what, we don't want you to fail, but we want to see results.

You need to gear your operation towards exports. And we're going to condition a lot of our support on increasing production, et cetera. What's the new industrial policy in Brazil? I keep hearing about that. And I guess the big question is, when you say new industrial policy, how does that differ from the old industrial policy? Lula, I believe it was earlier this year unveiled what he called you, his new industrial plan. I think it's worth, I forget exactly the figure, including, you know, a bunch of subsidies, local content requirements, credit lines, in order to attract investments, specifically in

manufacturing. And actually, the results so far are pretty good. The Lantus, B-UID, Great Wall Motors, a number of key firms have opened up plants in Brazil, and The idea is to be able to benefit from that technology transfer. And it's one thing just if foreign multinationals are opening up plants in your country. Another is that you can really actually learn from them and then create your own firms. There's been plants in Mexico for a long time, U.S. automaker plants, but Mexico does not have, as far as I know, a rising domestic auto industry of its own.

What are the barriers? Why is it that in some cases it's in theory that works? You have some foreign automakers like Ford set up a plant and then there's no-how and then there's domestic building and there's rising the value chain. And then sometimes you're still just basically capturing only a modest share of value as a place for and finishing and it doesn't spread out. Mexico is really today one of the few countries in Latin America that has a really robust manufacturing sector. But as you stated, it's all really just assembly. They just import inputs from abroad, assemble these finished goods and send them to the U.S. And this is actually how a lot of the Asian Tigers started out.

Taiwan, Singapore, et cetera. They started out assembling these goods and then exporting them. But they eventually graduated such to the point where, you know, they develop companies like Samsung, TSM, the like. and exactly why that hasn't happened in Mexico, for instance, in other Latin American countries, it's hard to say. I think we could chalk it up to an extent to a lack of imagination, honestly. So on that note, I mean, I know your expertise is Latin America, but do you think nowadays you could have a repeat of an embryo in the sense that you could have, you know, a homegrown high-tech industry despite the idea that there are all these, you know,

quite high barriers to entry, especially for something as complex as building aircraft? That's a tough question because if it were to happen, it would take decades. And it would take decades for us to see a firm that's really successful. I meant to get into this. MRAIR was really in crisis mode during much of the 80s and early. 90s, why? During the 70s, Brazil saw this huge boom upwards of like 10% growth each year, and they were investing in all these manufacturing companies, but a lot of that was finance with external debt. You get to 79, I believe, and Mr. Volker and the Federal Reserve starts

massively raising interest rates. This causes a huge crisis in Brazil that causes the country's debt to explode and similarly affected a lot of other countries in Latin America. You guys might have heard the term the last decade to refer to the 1980s. Interestingly, actually in Brazil, up until like 85, the military, their view was that they could pay down some of their debt by promoting exports. And they ran these huge surpluses. Then after 85, they started more of an austerity regime. There was also a slump in the early 90s because of the Gulf War. but the company was given like a half a billion dollar rescue package.

But when it was finally privatized, it actually had to be put up for auction like five times because it was viewed as so undesirable. So that's interesting. The Volcker shock sort of clobbering the economies of countries that had gone into debt to do domestic investment. You mentioned the Gulf War downturn, which I hadn't thought about. But after the military dictatorship ended, after 20, years and then the company went private.

Like, what was the sort of policy stance of the government at that time? Was it a sort of classic Washington consensus pursue that kind of liberalism? Like, what was the domestic policy environment during that sort of those rough years in the 80s and 90s? You know, I think you could say it's a bit of both. The key thing is that when the company was privatized, the government kept what's called the golden share, giving them, you know, veto power over change. and ownership and really strategic decisions

with regards to the running of the company. And it's really because of this golden share that the company is still a Brazilian company. Avi Bras actually, which I mentioned before, was completely privatized. The government kept zero ownership. And it's because of that that it runs the risk now of being sold off and no longer being Brazilian.

They had this pre-privatization venture into, I think it was the ERJ, J, they really took off after privatization. There's all these interests in regional jets. But on the one hand, there was a more laissez-faire approach. But, you know, because aviation manufacturers is really necessary to have support from the government. I mean, you know, Boeing and the like that they're government contractors. The support that Embra had received from the Brazilian state was similar to its more developed peers.

you know, they're still subsidized and the like. Juan David Rojas, thank you so much for coming out of odd luck. That was great. Thanks at a time, guys. Tracy, I'm really glad we finally did an Emberra Air episode. I think my big takeaway is it's really hard to make an airplane and you also just need a lot of luck. Yeah, it's funny you say that. I was about to say the exact same thing.

Like, there's a tendency to think like, oh, they must have done all the right things or there's some sort of like insight that you can pull out of this one specific example. But it seems in some respects, like, yeah, they got lucky. They made some good decisions. They had some good management. I guess the one thing that they did was identify that niche, right? And the other thing I was thinking about is actually Juan hit upon it really well in that second part where he was talking about how the geography of Brazil kind of lent itself to the need for aircraft. And I guess within that, you would want lots of regional or smaller jets because you're going to more remote locations and probably not, you know, big metropolitan centers all the time. And so in some respects, it kind of lent itself to that

regional jet or business jet idea. Totally. It dovetails with the point. Richard made to that one of the preconditions for establishing any sort of aviation company at scale is that really excellent customer support or customer service network. And so you think like, well, one really reason why Brazil and not any other country in Latin America is just by luck, I guess the sheer size and the sheer necessity of having to build out all that stuff at scale just to even serve the domestic market. Absolutely. The other thing that I think is interesting is that idea of like synergistic economic development.

And I guess we shouldn't make this a three-parter, but maybe we need to get Houseman on to explain why Emberra didn't like lead to a bunch of other. intergistic businesses in Brazil. Right. You'd think it would because, you know, there's like, are there certain component manufacturers that could then sell into others? Exactly right. All these different things or engines that go into a jet that can be modified for engines for something else. Also, if you're doing it for nationalistic reasons, at least initially, you would think that security would be a factor here that you wouldn't necessarily want to rely on imports for some of those, like, vital components and yet that seems to be the case here. So I don't know. Yeah. No, I don't know.

It's very interesting story. It is, I think to you, as you sort of, there's like, it's a little unsatisfying only in the sense that we can't look to Emberra Air and say like, oh, that's how it's done. Yeah, that's the blueprint. Because what you want is you want to see like, oh, this is, you know, I feel like when we talk about East Asian manufacturing success stories, that blueprint, at least on paper, looks a little bit clearer, right? It's like, yeah, you do final assembly first, and then you do this, and then you set a series of- There's like a natural progression. And you set these export targets, and then the companies that hit the export targets are

presumed to be making something good because they've satisfied the export test, and then you give them more, et cetera. But at least in Ember Air's situation, there aren't enough other examples of such a thing, although obviously the export discipline was part of it, where you could say. say, okay, now let's repeat this over and over again. Yeah. But still very fascinating. Absolutely.

I'm glad we did it. I am glad we finally. I still have questions. So maybe this will become like a multi-part series. It also, I mean, it is. The Houseman episode just sort of looms in my mind during the whole conversation because it's like, oh, yeah, you did it once. Why can't you do more?

Or why can't Mexico then do more, given the longstanding existence of final assembly plans? I don't know. I guess if it were easy, every country would be rich by now. You know what we should do. Joe. Every time we talk about that Ricardo Hausman episode, I get that vision of like monkeys leaping from tree to tree. We should write a children's song about economic development monkeys

and industrial policy or something. I'm seeing a children's book. Oh, a children's book. Oh, I like that. Okay. All right. Let's leave it there. Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Allo. And I'm Joe Wisenthal. You can follow me at the stalwart.

Follow Juan David Rojas. He's Rojas R.R.Wan D. Follow Richard Abu Lafia's firm Aerodynamic Advisory Aerodynamic Advice. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot, and Kale Brooks at Kail Brooks. And thank you to our producer, Moses, On Dom. For more Odd Lots content, go to Bloomberg.com slash oddlots. We have transcripts, a blog, and a newsletter that Tracy and I write every Friday. Go to sign up. And if you like to talk about all of these topics with fellow listeners, you can check out our Discord.

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