Embraer to Build 3,000-Employee,
$150 Million Brazilian Plant

A new mega-annoucement by Brazil's Embraer (www.embraer.com) underscores the big business of making small planes: The world's No. 4 aircraft manufacturer, Embraer is investing US$150 million to build a new 3,000-employee factory in the city of Gavião Peixoto in São Paulo state. The new facility will be located some 200 miles (340 km.) from Embraer's headquarters in São José dos Campos.

The decision to build the new plant was driven by two factors, company officials reported:
• an increase in international business, and
• the looming topout for further expansion at Embraer's existing manufacturing operations.

Currently the largest Brazilian exporter, Embraer several months ago reported a backlog of orders totaling $21 billion. Of that total, firm orders made up $8.6 billion, with options comprising the other $12.4 billion, company officials said.

Embraer's order total, however, got a huge bump up last month, when the company announced the second-largest deal in its history: a contract to supply GE Capital Aviation Services with 150 regional jets worth $36 billion.

Airspace a Major Factor
In Siting New Workspace

Located on a huge tract covering 3,630 acres (1,452 hectares), the factory in Gavião Peixoto will carry out flight-testing activities and perform final assembly for military and corporate aircraft. Operations will also include an Embraer service center and a new 5.89-mile (10-km.) runway for flight-testing activities.

Embraer considered a number of sites, with the Vale do Paraíba region regarded by some observers as the early favorite. A Vale do Paraíba location would have been much closer to Embraer's headquarters in São José dos Campos, where the company already has two manufacturing plants.

Ultimately, though, the decision on locating the new manufacturing space boiled down not to potential economies of scale, but to the need for a different kind of space - airspace.

"Flight testing of high-performance military aircraft requires large amounts of available airspace for maneuvering because of the high speeds and distances involved," said Maurício Botelho, Embraer's president and CEO. The Gavião Peixoto location provided the most available airspace among the competing sites, he added.

Site Cuts Costs for
Transporting Prototypes

The site in the Araraquara region also made bottom-line sense for a less obvious reason:

Low-speed control testing requires very long, very wide landing fields that currently exist only in the Northern Hemisphere, company officials explained. As a result, Embraer must periodically send its aircraft prototypes for testing at airfields in the Northern Hemisphere.

Gavião Peixoto offered a clear cost advantage for those transportation costs, according to Embraer officials. Company officials say that the new plant will also likely reduce Embraer's imports, which totaled $1.17 billion in 1999, company officials reported. Embraer, however, has not yet disclosed how much of an import reduction the new facility might facilitate.

Lack of Incentives Part
Of Embraer-Bombardier Dust-Up?

The Gavião Peixoto project's announcement comes as Embraer is embroiled in a trade dispute with Canada's Bombardier. At the heart of the quarrel are subsidies that were allegedly granted to the companies by their homelands' respective governments.

Significantly, Embraer's $36 billion deal with GE Capital Aviation Services reportedly included no tax breaks from the Brazilian government.

Similarly, at the announcement of the Gavião Peixoto plant, Sao Paulo Gov. Mario Covas emphasized that Embraer received no state fiscal incentives. That scenario is a notable departure from years past -- when Brazilian states often fiercely competed with one another, offering lavish incentives to major location projects.

However, part of the agreement to construct the Gavião Peixoto plant includes $18 million in assistance from Fapesp, the Sao Paulo state research support foundation. Fapesp also may finance $60 million of the facility's construction costs over a six-year year span, foundation officials explained.

Officials: HQ to Stay in São José dos Campos

Created in 1969 as a state-owned company and privatized in 1994, Embraer will retain its corporate headquarters in São José dos Campos, company officials emphasized. São José dos Campos, they said, will continue to be the site of Embraer operations that house the administrative, sales and engineering departments. The Embraer plants that are located in the city will also continue their production of commercial aircraft, corporate officials asserted.

The company's other operations include another Brazilian plant in the city of Botucatu, plus support centers in Australia, France and the USA. A consortium composed of four French aerospace firms is buying a 20 percent stake in Embraer.

In 1999, Embraer registered the best full-year earnings in its history. Revenues of $1.89 billion represented 44.4 percent growth from 1998. And net profit of $230.4 million marked a 111 percent increase over 1998. Embraer has now recorded 10 consecutive quarters of profitability.

Embraer currently has more than 9,000 employees. The new Gavião Peixoto operation, company officials explained, will add its 3,000 new jobs over a 10-year period.