VZCZCXRO6533
PP RUEHRG
DE RUEHRI #0601/01 3051657
ZNR UUUUU ZZH
P 011657Z NOV 06
FM AMCONSUL RIO DE JANEIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 3031
INFO RUEHBR/AMEMBASSY BRASILIA 9453
RUEHSO/AMCONSUL SAO PAULO 4367
RUEHRG/AMCONSUL RECIFE 2723
RUEHBU/AMEMBASSY BUENOS AIRES 0481
RUEHMN/AMEMBASSY MONTEVIDEO 0320
RUEHAC/AMEMBASSY ASUNCION 0330
RUEHSG/AMEMBASSY SANTIAGO 0165
RUEHOT/AMEMBASSY OTTAWA 0015
RUEKJCS/SECDEF WASHINGTON DC
RUCOMFA/HQ USSOUTHCOM J3 MIAMI FL
RUEANHA/FAA NATIONAL HQ WASHINGTON DC
RUEATRS/USDOT WASHDC

UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000601 
 
SIPDIS 
 
STATE PASS USTR:SCRONIN/MSULLIVAN 
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
STATE PASS EXIM FOR NATALIE WEISS, COCONNER 
STATE PASS USTDA FOR AMCKINNEY 
AID/W FOR LAC/AA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD EAIR MARR BEXP BR
SUBJECT:  BRAZIL'S EMBRAER:  SEEKING A U.S. DEFENSE RUNWAY FROM 
WHICH TO SOAR 
 
¶1.  (U) Summary:  On October 21 Admiral Edmund P. Giambastiani Jr., 
Vice Chairman of the Joint Chiefs of Staff, the Ambassador, and the 
Consul General met with Embraer President & CEO Mauricio Novis 
Botelho and Executive Vice President for Defense and Government 
Market, Luiz Carlos Aguiar, to review bilateral commercial relations 
between the U.S. and Brazil.  Our Brazilian interlocutors discussed 
Embraer's recent history and strong financial status, the company's 
success in the regional and executive jet markets, and its desire to 
continue doing business with the U.S., particularly in the defense 
"niche market."  Admiral Giambastiani emphasized the USG's need for 
joint service platforms that maximize military utility and cost 
efficiency.  End summary. 
 
EMBRAER'S POSITIVE RISK PROFILE 
 
¶2.  (U) Embraer's Botelho said he thought it would be fruitful to 
talk about the benefits that both countries can gain with increased 
partnership.  He started out by focusing on Embraer's positive 
financial status and risk profile, stating that he feels that 
Embraer is a "good example of what free trade is all about," with US 
20 billion dollars in exports last year and 10 billion dollars in 
imports.  12 to 14 billion dollars worth of goods and services were 
exported just to the US.  Those statistics put Embraer just behind 
Airbus (France) and Boeing (US) in the aircraft market, and vying 
for third place with Bombardier (Canada).  Botelho indicated that 
Bombardier is technically bigger in terms of overall revenue, but 
that Embraer has surpassed Bombardier in commercial aircraft. 
Embraer represents approximately 50 percent market share at present 
in 36 to 126-passenger aircraft. 
 
¶3.  (U) Operating in 69 countries, the company enjoys excellent 
financial status and recently received an investment grade rating by 
both Standard and Poors and Moody's.  The company has a nearly US 14 
billion dollar backlog of solid orders and an additional almost 15 
billion dollars in options, totaling more than 2,000 aircraft, and 
it has been ranked as one of the largest Brazilian exporters since 
¶1997.  It is a major player on commercial aircraft, and has a niche 
operation in the defense market.  In the U.S., Embraer has 
facilities located in Ft. Lauderdale and in Nashville.  In addition, 
it recently announced that it will establish facilities in New 
Hartford, CT and an additional one in Ft. Lauderdale, as well as one 
in Mesa, Arizona which will potentially employ 250 workers. 
Currently, Embraer has 38 additional service centers to sustain its 
fleet of business jets. 
 
¶4.  (U) Embraer has developed risk-sharing partnerships with major 
U.S. aerospace companies, including General Electric Engine Company, 
Allison Engines (later purchased by RR), Honeywell, Hamilton 
Sundstrand, C&D, and Goodrich.  It also has relationships with 
suppliers distributed among 25 U.S. states, and estimates that more 
than 7,000 U.S. jobs were either created or maintained in 2005 from 
a component purchase.  More than 1200 aircraft have been sold to the 
U.S., including 345 turboprops and about 800 jets. Airline customers 
include American Eagle, Continental Express, Republic Airways, 
Midwest, Tran States, Mesa, Gecas, US Airways, and Jet Blue. 
Botelho characterized the 70-80, 100, and 126-seat jets as "small 
big jets", saying they really don't meet the criteria of regional 
jets anymore given their passenger capacity and comfort. 
 
INVESTMENT IN THE FUTURE AND "PROTECTING THE CAMP" 
 
¶5.  (U) According to Botelho, the history of Embraer shows a 
successful evolution from a state-owned enterprise to privately held 
corporation.  State-owned until December, 1994, it was privatized in 
1995, when current management took control.  In 1997, it reached 
break-even in terms of profitability, and since then has steadily 
grown.  Embraer employs 19,000 employees worldwide, including 3,000 
outside of Brazil, and has more than 4,000 engineers.  From 2001 to 
2005, about 540 engineers graduated with master's degrees 
specializing in aeronautical engineering, all paid for by Embraer. 
As Botelho says, "it's a business based on knowledge."  The 
 
RIO DE JAN 00000601  002 OF 003 
 
 
Ambassador complimented Botelho on training some of the world's best 
engineers and observed that Embraer is currently suing Gulfstream 
for recruiting some of them away.  Botelho said, laughing, "the 
Admiral will understand this.  We have to protect our camp." 
 
¶6.  (U) Adm. Giambastiani acknowledged that skilled people are in 
tremendous demand, and asked what had brought Embraer to the 
decision to provide the training.  Botelho said that they had 
analyzed the situation and realized there was not enough flow in 
Brazilian universities to supply the demand.  It was not the level 
or quality of education available; Embraer's parastatal parent was 
created in the 1950s, and its first dean had previously been the 
head of the aeronautics department at MIT, so it was created with 
the same curriculum and standards.  "But," said Botelho, 
"Competition is heavy.  The investment banking sector takes a lot of 
our engineers away. . . it is really our biggest competitor." 
 
COMPANY STRUCTURE 
 
¶7.  (U) Embraer restricts voting power to five percent for any 
shareholder, and limits foreign ownership to that of 2/3 of the 
Brazilian shareholders.  Botelho indicated that if any shareholder 
reached 35 percent, Embraer would be forced to open the company to a 
100 percent public offering.  The GOB retains one voting share, to 
assure veto power on such proposals as new military programs, 
transfer of technology to other countries, changes in the bylaws, 
and the ability of someone else to purchase the company.  However, 
said Botelho, even if a prospective buyer could achieve government 
buy-in, the company is further protected: the prospective buyer has 
to meet an asking price that is the value of the company plus 50 
percent.  As Botelho said, "That makes it less attractive."  Embraer 
shares are traded on the NYSE and Sao Paulo Stock Exchange at 60 
percent and 40 percent of its shares, respectively-further 
protection through market diversification. 
 
FROM CORPORATE JETS . . . 
 
¶8.  (U) The Ambassador turned the conversation to small, private 
business jets.  Botelho said that five years ago, Embraer launched 
the Legacy aircraft, with the intent to understand and learn how the 
market for small, executive jets works.  They "learned a lot," and 
the Legacy-600 was born.  From there, they launched a couple of new 
product lines with specialized or niche markets.  They do not plan 
to build large numbers of these craft, but the intent is to "show 
the market that they are following demand." They are also competing 
effectively with larger and/or more expensive aircraft in terms of 
comfort and features offered; Legacy aircraft are being very well 
received, with about 320 orders so far, projected to be ready in two 
tranches in mid-2008 and mid-2009.  The executive jet market is 
growing, and Botelho believes it will keep growing.  As for defense, 
he sees that as a "niche operation, with some opportunities." 
 
TO POSSIBLE DEFENSE SALES TO THE USG 
 
¶9.  (SBU) The Admiral stated that while he does not negotiate 
contracts, he would be happy to respond to Embraer's questions 
regarding the direction in which the US is moving, in particular 
with respect to intelligence, reconnaissance and surveillance (ISR) 
aerial manned platforms.  Adm. Giambastiani explained to Embraer 
President Botelho and Vice President Aguiar that he is co-chairman 
of the USG's Defense Acquisition Board and that all programs for 
acquisition go through the Board.  While there are a variety of 
other mechanisms within OSD for contract solicitation, no programs 
can go through without the Board's approval. 
 
¶10.  (SBU) Botelho said that Embraer looks at the defense market not 
so much as competing with U.S. firms, but complementing U.S. 
partners in competing for defense work.  The reliability of its 
originally proposed Aerial Common Sensor (ACS) aircraft [E-145] is 
estimated at 99.75 percent.  With prime contractor Lockheed Martin, 
Embraer had been contracted to deliver 38 aircraft for the US Army, 
 
RIO DE JAN 00000601  003 OF 003 
 
 
and 19 aircraft for the US Navy, with deliveries anticipated from 
2009 to 2017.  The contract was awarded in August 2004 and 
terminated in Jan. 2006.  Botelho said that by the time the contract 
was awarded, the ACS platform complied in total with stated 
requirements, but when the program became Joint with the Navy and 
requirements grew,  it became evident that the E-145 could not meet 
the increased weight, power and cooling requirements.  Embraer 
worked rapidly and flexibly to offer the larger E-190 instead, but 
it was not feasible to effect the mission payload integration within 
the costs of the program and the contract was terminated by the 
Army.  It "would have been a big hit for Embraer to serve the U.S. 
government and to open new opportunities abroad," Botelho said 
ruefully.  As he put it, "Our situation today is that we have the 
conditions to keep supplying value.  Where and how are the 
questions.  I honestly do not know if there is additional 
opportunity, and would like to hear from the U.S." 
 
¶12.  (SBU) The Admiral noted that a series of studies was 
commissioned in the U.S. as to whether manned or unmanned platforms 
would meet future military requirements.  Unmanned platforms do not 
meet all those needs, so there will be a program for a manned ISR 
platform.  However, the program will be Joint from its inception, 
incorporating all Army and Navy needs up front.  He said, "You will 
see the U.S. come back in for solicitations and bids in 2007," 
cautioning once again that he does not handle that, but will be 
reviewing requirements and cost drivers.  But as he said, "We are 
serious about the program.  But it must be a joint program, a joint 
operation, and a common platform."  The Admiral stressed that the 
U.S. military's focus for the future would be capability, 
reliability, and cost effectiveness, including examining long-term 
life cycle costs and energy efficiency.  Botelho closed by saying 
"We will compete strongly!" 
 
¶13.  (U) This cable was cleared by Ambassador Sobel and Admiral 
Giambastiani's staff. 
 
Martinez