21 Aug 2000  Research & Ideas

From Emerging Economies to the Global Market: The Case of Embraer

How can a company from an emerging economy manage to make waves in global business?

Ask Embraer. The Brazilian firm also known as Empresa Brasileira de Aeronautica S.A. is the fourth largest commercial aircraft manufacturer in the world, behind Boeing, Airbus and Bombardier. In mid-August, it posted a 54 percent jump in sales and a 35 percent gain in second-quarter earnings.

A new HBS case study on Embraer, presented in Buenos Aires (in a modified version of how such a case might be taught in a standard classroom setting), offered plenty of room for lively debate among conference participants. Questions they considered: What key elements of strategy and competitiveness will help a firm from an emerging market suceed internationally? How can a government assist a company without smothering it?

Another point of central interest in the Embraer example was an ongoing dispute between Embraer and the Canadian manufacturer Bombardier, which has yet to be settled by the World Trade Organization. Conference participants offered a variety of predictions on how they thought the dispute could and should pan out.

According to Professor Pankaj Ghemawat, who led the discussion (while injecting what he called "procedural asides" to demonstrate how the case might be taught in a classroom), the Embraer case also illuminated ways that companies might craft a strategy to balance two spheres of influence: market and non-market forces.

Issues unique to the region

The case on Embraer, Ghemawat explained to the audience in his introduction, is one of the first "outputs" of the School's new Latin America Research Center (LARC). It was co-written by Ghemawat with LARC executive director Gustavo Herrero and senior researcher Luis Felipe Monteiro. Ghemawat, who originally started the case for his elective course on Globalization and Strategy, said that it also illustrates the first efforts of the LARC advisory committee to address business issues unique to the region.

"We started talking about what was distinctive about the Latin American context," Ghemawat said of their early meetings, "and about what research and course development efforts in this area—whether by Harvard or by other institutions—really needed to reflect."

The basic macro environment in emerging economies, he explained, is very different from that of developed economies that sometimes end up getting treated as a "base case."

"We talked about the role of government. And, while it's useful to focus on market strategy, the non-market components of strategy were things that needed to be highlighted as well."

Keys for strategy

"There's a lot going on in the case," Ghemawat warned the audience as the discussion began. "There's a lose-to-a-billion dollar commitment that Embraer is close to making for a new family of aircraft. There's an extraordinarily complex and bitter dispute at the WTO between the Canadian and Brazilian governments about Embraer versus Bombardier in the regional jet market. In addition, Embraer is selling or has sold a fraction of its equity to a French consortium. Plus, an IPO is being planned."

"What problems confront a company that's trying to become internationally competitive? What sorts of problems are Embraer's partnerships trying to overcome?"

As a company, conference participants said, Embraer had made a number of smart moves. Its human resources strategy was rejuvenated for flexibility, so people were motivated to work there. The company had lowered the cost of capital by sharing risks, first with the government and then, through outsourcing, with suppliers. It focused very early on foreign markets, rather than just on the domestic market.

While the company had clearly benefited from its relationship with the government, said one participant, it had somehow avoided being trapped in the government's embrace.

As Ghemawat told the group, "In some sense the Embraer strategy is not very unusual. It's almost a prototypical strategy from one of these environments trying to become internationally competitive.

"When we looked at India and Argentina and a number of other countries, we see islands of competitiveness, where companies have managed to succeed in decoupling themselves from the most negative elements of the domestic environment while retaining the positive elements, as they attempt to become competitive."

"Embraer is an example of the power of not just assuming that because you are based in a country, you necessarily have to be subject to all the disadvantages imposed by that particular context."

"Wrapping up in the brazilian flag"

When Ghemawat turned the discussion to the WTO dispute and asked participants for their reactions, most suggested that companies in emerging economies need to brace themselves for such legal battles on the global stage.

One commentator thought this particular dispute would blow over. "I think there's a lot of saber-rattling going on," he explained. "Canada has a very large number of investments in Brazil. Things will calm down."

Added another: "My impression is that the arguments are very biased in favor of the developed country. Secondly, the developed countries are a lot more professional in hiding their own tricks.

"If we got rid of the biases and put all the tricks on the table, the situation is a lot of more balanced than people tend to believe, at least in the developed countries."

Commented a third, "It looks like the company will need to develop a new set of skills. They have managed to be competitive with their global competitors, but now the arena is moving to the WTO, and that's different competition. They are not competing with similar airplanes, they are competing on who convinces the WTO better; and probably they need to work on their government skills.

"Which government will be more efficient in convincing the WTO? It's striking that Canadians are fighting Brazilians… Embraer has to develop, with their government, a way of defending the company, and [defending] the country's interests, as well."

"The temptation is to wrap up in the Brazilian flag and say, 'The big guys always win.'

"There are skills you need negotiating in that new forum that are absolutely critical," he asserted.

No delusions

One of the purposes of writing the Embraer case, Ghemawat reminded the group, was to bring business-government relations back to the fore. As business moves forward, he said, it's important to keep in mind that in any industry the scope of strategy vis-à-vis government has expanded beyond traditional musings about "How will we influence the government on domestic regulation?"

"We should start thinking about the potential scope for these kinds of issues in globalization. If this is the positive of globalization—the ability to try and transcend the difficulties of your domestic context in order to improve your competitiveness," Ghemawat said, "then one of the downsides, or at least one of the managerial challenges, is that it's hard to imagine these kinds of disputes ceasing very quickly."

One of the biggest delusions in world business, he added, is that governments will entirely step out of the way. "You still need the government for dealing with other national governments, and for representation before groups such as the WTO.

"And non-market strategy also has to expand beyond just thinking about relationships with the government, to thinking about non-governmental organizations which are very much on the rise as well."