As Wichita planemakers grapple with the downturn in the business jet market, they're keeping a keen eye on the competition.
One of the biggest threats to Wichita's business jet industry is 7,600 miles away.
That's where Brazil-based Embraer — long a maker of regional and military jets in a colorful country known for samba, sugar cane and soccer — has entered the market in a big way.
Embraer is coming directly after Wichita's part of the market, experts say.
Over the next 10 years, Embraer could take as much as 15 to 20 percent of the market away from Cessna Aircraft, Hawker Beechcraft and Bombardier Learjet, said Teal Group analyst Richard Aboulafia.
"I'm very concerned about them," Hawker Beechcraft CEO Bill Boisture said. "They're entering with price points, size and performance carefully selected, in my view."
Two weeks ago at the National Business Aviation Association's annual convention in Orlando, Embraer announced its seventh business jet, the Legacy 650, a large, long-range $29.5 million aircraft. It's the sixth business jet Embraer has introduced in the past four years.
A few years ago, Embraer wasn't on the radar screen.
The company, based in Sao Jose dos Campos — a city of 600,000 in southeast Brazil —announced in 2005 its intention to become a major player in the business jet market by 2015.
"That's still the goal," Luis Carlos Affonso, Embraer executive vice president for executive jets, said during an interview at the company's exhibit at NBAA.
Like Wichita's planemakers, Embraer has felt the impact from the economic downturn. That hasn't stopped its plans.
"We will grow slower than we thought we would," Affonso said. "The big picture is unchanged."
Embraer has Wichita's attention.
"They are going to continue to be a real thorn in our side," Cessna CEO and president Jack Pelton said. "They're not going away."
Embraer has an aggressive, smart product development strategy, Aboulafia said. Coupled with its low pricing, the company is a formidable competitor.
In past years, Wichita planemakers studied one another, Gulfstream, Dassault and a handful of other companies.
The competitive balance was pretty well fixed.
Traditionally, the barriers to enter the business jet industry have been high. It's a highly regulated, expensive and difficult market to penetrate.
Since 1960, only one new company has entered the market in a meaningful way.
"And it's Embraer," Aboulafia said. "These guys mean it."
One of Brazil's largest exporters and a top employer, it's a proven jetmaker backed by sizable resources and facilities. Unlike startup companies, it didn't have to search for investors with millions to invest to get into the business jet industry.
And it knows how to design, produce, certify and deliver aircraft.
Embraer's niche is in aircraft designed for high utilization.
"We know how to do that," Affonso said.
Sao Jose dos Campos is 65 miles from Sao Paulo, Brazil's biggest city with more than 11 million people.
The company built a state-of-the-art assembly plant amid sugar cane fields and orange groves at Gaviao Peixoto (Gah-vee-OH Pe-HOW-toe), 230 miles from its headquarters.
The plant was built to take on its new line of light jets.
Embraer's facilities are not unlike the modern aircraft plants in Wichita, except that large green, yellow and blue Brazilian flags dot factory walls, and signs are written in Portuguese.
The company — Empressa Brasilerira de Aeronautica — was founded in 1969 as a government initiative.
After sliding into a deep financial crisis, it was privatized in 1994. At the time, employment dropped to 3,200.
After years of costing Brazilian taxpayers millions of dollars, Embraer reformed itself, Aboulafia said.
"They did everything right," he said.
It employs about 17,000 people, down from 23,500 a year ago.
The company entered the business jet market after investing in the Legacy 600 super midsize jet, a regional jet derivative.
It later added the larger Linneage 1000, the smaller Phenom 100 and Phenom 300 and the mid-light and midsize Legacy 450 and 500.
The Legacy 650 unveiled during NBAA has been in development since last year. It's expected to be certified and delivered in 2010.
In 2008, Embraer delivered 38 business jets. In the first nine months of 2009, it delivered 54.
The company has 750 orders for the $3.6 million Phenom 100 and its $6.85 million Phenom 300.
Those jets "are starting to do damage," to Wichita, Aboulafia said.
And in 2012 and 2013 when the Legacy 450 and 500 come to market, "they'll really start doing some damage to some key Wichita programs," he said.
Competing with Wichita
Wichita planemakers call Embraer a low-cost competitor because of Brazil's low wage rates.
They must compete with Embraer's aggressive pricing. To that end, Wichita companies must cut costs, planemakers say.
Affonso disagrees that the company is low-cost.
Embraer buys the majority of its systems components and raw materials from U.S. sources. And labor costs have risen, he said.
By 2011, Embraer will employ more than 1,000 people in the U.S. between its service centers and an assembly plant it will open in Melbourne, Fla., Affonso said.
The company has a positive impact to the U.S. balance of trade, he said.
"We buy more parts components than we sell planes to the U.S.," Affonso said.
Forty-three percent of Embraer's revenue comes from the U.S.
Wichita planemakers also sell planes into Brazil.
One of Wichita's strengths is the companies' customer loyalty and the establishment of their brands and customer service networks, Aboulafia said.
The biggest area of concern for Wichita is Embraer's aggressive product development, he said.
"Cessna and Hawker Beechcraft are falling behind," Aboulafia said.
Product development has been hurt in the downturn.
Hawker Beechcraft stalled the Hawker 450 program and the timeframe for a Premier II has been extended. Those "would have been great," Aboulafia said.
In addition, "an aggressive Cessna strategic product roadmap would have been great," he said.
Cessna was forced to cancel the Citation Columbus large jet program because of the downturn.
At NBAA, Pelton said the company would resume development of the aircraft when the timing is right.
Wichita planemakers note that product development continues so that they'll be ready for the recovery.
Affonso said he has great respect for Wichita planemakers.
"These are very traditional companies," he said. "They have very strong brands and a very strong customer support base. They are very good companies."
Embraer is a "different company, with different brands and different airplanes," Affonso said.