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Trimble S, 02-Apr-2013. In Defence of Brazil, Flight International

Trimble S, 02-Apr-2013. In Defence of Brazil, Flight International

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Published by: Foro Militar General on Apr 15, 2013
Copyright:Traditional Copyright: All rights reserved


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Flight International
2-8 April 2013
Embraer Defense Systems is enjoying the benefits of itshome nation’s intensified focus on security, which hasprompted dramatic expansion in its range of expertise
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wo years can seem like a long time inthe revitalised Brazilian defence mar-ket. While the lengthy delay to the airforce’s FX-2 fighter contract award re-ceives most of the attention, the Brazilian mili-tary and the national defence industry havemoved forward aggressively in key areas, reveal-ing a new appreciation for taking national andregional security obligations more seriously.Perhaps the most telling example of thistrend is the rapidly diversifying portfolio of Em- braer Defense Systems. In 2012 alone, Embraerwon a landmark border surveillance contractfrom the Brazilian army, formed a joint ventureto manage satellite construction projects, pub-licly began contemplating a surprise entry intothe shipbuilding industry, and – not least –posted a 24% increase in annual revenues, top-ping $1 billion in defence and security sales forthe first time in the company’s history.The wide scope of those interests point to-wards Embraer’s evolution into Brazil’s mainprime contractor for a rapidly growing set of defence and security needs. It is a strategy like-ly to reshape the company’s portfolio of prod-ucts in the defence sector in less than a decade.
At the beginning of 2012, Embraer expected75% of its defence revenues to come from fourmajor programmes: development of theKC-390 transport and tanker; modernisationof AMX/A-1 and Douglas A-4 combat aircraftfor the Brazilian air force and navy; the A-29/EMB-314 Super Tucano; and EMB-145-basedP-99 and R-99 surveillance and command andcontrol aircraft. It was a list with a healthy po-tential backlog and well within Embraer’scomfort zone as an aircraft manufacturer.By 2020, Embraer expects the fighter mod-ernisation programmes and the P-99 and R-99production lines to be gone, with the KC-390and light attack aircraft to account for 43% of the defence company’s overall revenues.Meanwhile, revenues generated by severalnew business product lines, featuring Em- braer as a border surveillance integrator, satel-lite construction manager, unmanned aerialvehicle maker and possibly even a shipbuild-er, will contribute 42% of sales by the samepoint, according to its projections.To be fair, Embraer had dabbled in the sys-tems integration business in the past. It createdan air operations centre for Mexico, which con-nected to the nation’s EMB-145-based airborneearly warning and control system aircraft. It hadalso participated in the creation of the Brazilianair force’s system for the surveillance of the Am-azon (SIVAM), as a subcontractor to Raytheon.There were no system integrators in Brazilwhen the SIVAM programme was awarded inthe mid-1990s, as the country was in the
The Hermes 450 is being adapted to local requirements
2-8 April 2013
Flight International
FOREIGN DEFENCE companieshave been doing well in Brazil.With rising security needs anda small deence industrialbase, the nation has beenorced to go beyond its bordersto buy military hardware.So: Brazil’s new submarinescome rom France, its latestocean patrol vessels come romthe UK and its new fghter will beacquired rom France, Swedenor the USA; the last in a compe-tition between the Raale,Gripen E and Lockheed MartingF/A-18E/F Super Hornet.But a new law passed in2012 seeks to change Brazil’sreliance on oreign companiesor major weapons systems.Public law 12.598 establishesa new category or a “strategicdeence company”, o which atleast 60% o the shares areowned by Brazilians.It is not the frst time a gov-ernment has leveraged its de-ence budget to incentivise orprotect a domestic industry. TheUS deence industry is shieldedrom some oreign competitorsby the Buy American Act andthe Berry Amendment.Brazil’s new law does notprohibit oreign companies romcompeting on military hardwareor services bids, but it doesmake it harder or them to win.Instead, the law exempts stra-tegic deence companies romBrazil’s tax on industrial goods,and rees them rom obliga-tions to contribute to unemploy-ment insurance and socialsecurity programmes.The move appears partly aimed at countering the oreigndeence companies that havebeen buying ownership stakesin Brazilian deence companies.“There is no prohibition orsomeone who is a multina-tional company, but they arenot to be eligible or the ben-efts o being a strategic de-ence company,” says LuizCarlos Aguiar, chie executiveo Embraer Deence Systems.The programme has already caused a minor restructuringwithin the deence industrialbase. Two years ago, Embraerormed the Harpia Systems jointventure with Elbit Systems sub-sidiary AEL Sistemas, with equalownership by both companies.As a result o the law, ormerEmbraer rival Avibras agreed tobuy 10% o Elbit’s stake in the joint venture, increasing thenumber o shares owned by theBrazilian frms to 60%.
midst of a near two-decade reduction in de-fence spending.National priorities have shifted in the pastdecade, however, as Brazil has embraced alarger role on the regional and world stagesand discovered a new wealth of oil and natu-ral gas deposits within its maritime borders inthe South Atlantic.Defence spending remains at a modest1.6% of gross domestic product, but the coun-try’s rising economic output means spendinghas risen proportionately. Overall spendingpeaked in 2012 at $36 billion, of which about$5.16 billion was set aside for investmentssplit between the three armed services.“That’s above what we had last year,” saysLuiz Carlos Aguiar, chief executive of EmbraerDefense Systems. “There are some importantprogrammes they have been reducing becausethey are finalising, and they are being replaced by others. That’s why I believe we have spaceto grow in Brazil. Out of this $5 billion, Em- braer, as a group, have 27%.”If that level of spending is sustained Brazilwill be buying much more than new fightersand KC-390s during the next decade. Themilitary is seeking to modernise its invento-ries of combat and support equipment, whileintroducing a wide-ranging surveillance net-work over the country’s porous southeastern border and territorial waters.Indeed, Brazil’s ambitions grew so large it ap-peared to briefly force Embraer on the defensive,as the promise of lucrative systems-integrationcontracts energised new competitors from thecountry’s construction companies. Salvador- based Odebrecht formed an alliance with Euro-pean prime contractor and EADS subsidiaryCassidian to compete for the border surveillancecontract. Another Brazilian construction firm,Synergy Group, teamed up with Israel Aero-space Industries to pursue the same work.In the end, the army awarded the $400 mil-lion contract to Embraer in November 2012 tolaunch phase one of the system for the sur-veillance of the frontiers (SISFRON) contract.The award appeared to deflate the hopes of Embraer’s erstwhile competitors. Follow-onawards for SISFRON are still available and theBrazilian navy plans to launch a similar pro-gramme next year, but the Odebrecht/Cassidi-an joint venture has reportedly been dissolvedin the aftermath of losing the army contract.
Instead, Embraer appears to have secured itsnew role as the Brazilian military’s most im-portant prime contractor, with billions of dol-lars in new programmes waiting on the books.With the KC-390 headed for series produc-tion, Embraer Defense Systems is set to contin-ue its seven-year growth trend, including thedefence unit that existed before the standalonecompany was formed. Defence sales accountedfor only $227 million of Embraer’s revenues in2006, but more than $1.05 billion in 2012.The defence unit’s share of the company’soverall revenues has nearly tripled to 17%, evenas Embraer has introduced the Phenom 100 and300 business jets to its product line-up.The key for Embraer now will be executingon the SISFRON programme. It has only re-ceived the phase-one award, but the overall pro-gramme is valued at $4 billion during the nextdecade. The system is going to create a networkof border surveillance stations, with ground- based radars, UAV sensors and command andcontrol systems networked together to identifyand catch smugglers crossing the open border.“Until March we are going to finalise all of thesubcontractors on the SISFRON contract,” saysAguiar. “We have a deadline by the end of March, and we are in the process right now. We
The law exemptsstrategic defencecompanies fromBrazil’s tax onindustrial goods
The fleet of the Brazilian air force includes Lockheed P-3 special-mission aircraft and Northrop F-5 fighters
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