Brazil's jet dogfight
By MARK
MACKINNON
From Saturday's Globe
and Mail
Sao Jose dos Campos, Brazil — A sleek collection of
factories and office towers set against a background of
multi-storey homes, Sao Jose dos Campos looks, from
the highway heading into town, positively First World.
The slums that dominate other Brazilian centres are
almost nonexistent in this city of 500,000 nestled
between the gentle green hills and scattered settlements
of Sao Paulo state. Instead, corporate logos dot the
landscape — defence contractors, information
technology startups, multinational communications firms
and a fledgling space program.
Tens of thousands of Brazilians work in the city, in jobs
that are high-paying by the developing country's
standards. Tens of thousands more apply annually for
jobs here.
If Brazil had a Silicon Valley, a high-tech economic
engine, it would be here, 100 kilometres northeast of
Sao Paulo city. And at the economic heart of Sao Jose
dos Campos is Embraer SA, the country's home-grown
aerospace giant, with about 10,000 employees of its
own.
"Embraer is good for the city," said Carlos da Silva, a
chauffeur in the area. "It is the centre of everything."
Somewhere in this picture is the reason Brazil is more
than willing to go toe-to-toe with Canada in what would
surely be a mutually harmful trade war, one that revolves
around an argument over who subsidizes their
aerospace industry more. Sao Jose dos Campos is a
model of industrial development the government wants
to replicate across this impoverished country. It
can't let
the working models it has die off — at any cost.
Since privatizing in 1994, Embraer has rapidly become
the world's fourth-largest commercial airplane producer
and the blood rival of Montreal-based Bombardier Inc.
Two years ago, Embraer passed mining firm Vale do
Rio Doce to become the country's largest exporter. In a
country where horse-drawn carts compete for space on
city roads with the latest Mercedes model, that's raised
hopes of a high-tech revolution.
"Embraer has become, in a sense, a symbol — just like
Bombardier is in Canada — of success," said Jose
Alfredo Graca Lima, Brazil's top trade negotiator. "As a
country, we are concerned that we should produce
more technologically sophisticated goods."
Those outside Brazil, he said, do not understand the
company's importance in helping modernize the
country's economy. Its success is crucial, he argues, if
Brazil is to change its image from that of a producer of
bananas, coffee and shoes.
Embraer is the byproduct of one of the few examples of
long-term planning by the Brazilian government that
worked out as planned. In the early 1950s, the
government established the Aerospace Technological
Institute, which created in subsequent decades a critical
mass of well-trained aerospace engineers.
The Brazilian government also created Embraer,
originally to manufacture military planes, and ran it as a
public company until 1994, losing millions of dollars in
the process.
After it was privatized, Mauricio Bothelo, the company's
president and chief executive officer, launched what he
called the "Redemption Project" — turning the
company's focus from the military side toward a regional
jet market still in its infancy.
It was a prescient move. The company's
assembly-line-like hangars here are full of dozens of
37-, 44-, and 50-seat jets in various stages of
construction. The multitude of logos painted on the sides
— Air France, Swissair, Continental Airlines, American
Airlines — demonstrate the company's widespread
customer base.
The company has built up an order backlog of almost
1,000 regional jets. With gross sales jumping from
$377-million (U.S.) in 1996 to $2.7-billion last year,
Embraer has emerged as a strong No. 2 in the regional
jet market, trailing only Bombardier.
Some sources suggest Embraer, which manufactures
cheaper planes than Bombardier, largely because of
lower labour costs, may even be winning the regional jet
war. According to the Airline Monitor trade magazine,
Embraer won 898 jet orders in the past five years
through the end of last year, compared with 796 for
Bombardier. Now Embraer is moving into another
Bombardier-dominated area, the corporate jet market.
Bombardier is expected soon to announce a contract to
build up to 150 jets — 75 firm orders and 75 options
— for Air Wisconsin, a United Airlines affiliate, numbers
that would push Bombardier back in front. But there's a
creeping feeling at the company's Montreal headquarters
that Embraer is eating away at its business. And in
Bombardier's eyes, they're doing it unfairly, with the
help
of illegal government subsidies.
Five years ago, believing its companies were at a
disadvantage when competing internationally with those
in the developed world, Brazil established Pro-ex, a
program that offers cut-rate loans to buyers of Brazilian
exports.
The government and most of the Brazilian media see
Pro-ex as a necessary equalizer for a country where the
cost of financing (interest rates regularly hover in the
15-per-cent range) is several times higher than in more
industrialized nations. No company has made better use
of the program since it was created than Embraer.
"I would love to have a level playing field, to have
Bombardier's level of financing," Henrique Rzezinski,
Embraer's vice-president of external relations, said in an
interview at the company's headquarters this week. "The
fact is Canada is a mature economy, a stable economy,
with social conditions we would love to see in Brazil.
Canada no longer needs a Pro-ex."
Pro-ex is at the core of a dizzying series of World Trade
Organization complaints and an increasingly heated
exchange of undiplomatic rhetoric between the two
sides. It also has Canada and Brazil at the brink of a
trade war, with the WTO having given Canada the
green light to slap punitive tariffs on Brazilian goods
entering the country, and Brazil threatening to
retaliate in
kind if it does.
The WTO originally declared Pro-ex illegal because it
offered loans at well below the market rate. Brazil
believes modifications it has made since have brought
the program into compliance, an assertion that Canada
is once more challenging.
Last month, Canada opened a new front, offering a
Bombardier buyer a cut-rate loan package through the
secretive Canada Account of the Export Development
Corp. In announcing the move, Industry Minister Brian
Tobin declared it was a necessary response to
continued Brazilian subsidies.
To Brazil, it was business as usual for Canada, except
that this time it was forced to admit the subsidy after it
was reported in The Globe and Mail.
Mr. Rzezinski charges that Canada is as deep into the
export subsidy game as Brazil is. The only difference is
that Canada does it much more quietly, through the
secretive EDC, which doesn't have to report who it
loans money to and under what conditions.
Here in Brazil, Canada's stance against Pro-ex smacks
of hypocritical First World imperialism, of a developed
nation trying to deny Brazil the tools it used itself
to build
up companies like Bombardier.
Canada, some point out, hasn't taken the United States
and the European Union to the WTO over their
persistent agricultural subsidies. But it's quick to
use all
the weapons at its disposal in this fight.
"The message being sent is that Canada exports
airplanes, Brazil exports coffee beans, and that's the
way it should stay," Mr. Rzezinski said. "If Embraer was
based in Copenhagen, we would not be having the same
kind of dispute."
