MULTINATIONAL CASE STUDY

Professor: Alan Sitkin (Senior Lecturer)

Student: Augusto Teixeira Modesto ID: S00603788 LONDON 2012

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SUMMARY
I. Strategies of international business into the Chinese market....3

I.I.

Introduction.3

I.II.

The first steps into Chinese market...3

I.III.

A strategic alliance is settled...4

I.III.I. Analysis of the developed scale commitment in 2002....5

I.IV.

The creation of a wholly owned subsidiary company..6

I.IV.I. Performance appraisal related to the boundaries of the firm .6

II.

Recent perspectives.6

II.I.

Challenges and reflections related to Embraers international business into china...7

III.

Bibliography...9

EMBRAER AND THE DREAM TO DEVELOP ITS MARKET IN CHINA.

I. STRATEGIES OF INTERNATIONAL BUSINESS INTO THE CHINESE MARKET.

I.I.

INTRODUCTION.

Embraer is a Brazilian company that operates in the executive, commercial, service and support aviation market. Since 1998, the company has developed some valuable strategies to advance in the foreign markets in order to avoid internal saturation, expand its sale, and conquer new markets. Henceforth, we are going to discuss all the steps and decisions that guided the Embraers executive managers to achieve its objectives in the Chinese market and what could be proceeded different.

I.II.

THE FIRST STEPS INTO CHINESE MARKET.

From 2000 on, the desire of expanding dramatic affected the Embraers scale of commitment in the internationalization related to the Chinese market. According to Embraers report, China was chosen between the Asia countries for its promising and constant rising market at that time (Embraer 2000). Besides, Olympic Games in 2008 would be a tremendous event that could result in plenty sales opportunities, and due to the restriction caused by the Chinese government, a lot of competitors were not willing to submit to Chineses interventions (Bonini, 2005).

I.II.I.

ANALYSIS OF THE INITIAL APPROACH IN 2000.

First and foremost the managers analytical vision of Embraer related to the Asian market was crucial to the subsequent success of Embraer in China. Beyond the above justifications, it is also important to remember that there was not a direct and national competitor in Chinese executive aviation market in 2000 as it existed in Japan.
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Moreover, political issues involving China and other countries conceded a great opportunity to a Brazilians company capitalizes on a strategic Chinese market, insofar as Brazil has always been a neutral country.

At this point, since the company had already promoted FDI in other countries previous 2000, we can conclude that the fear of a foreign market like China, surrounded by uncertainties and a rigid and sometimes dictatorial behaviour of its governments, instilled fear and precautious into the heart of the Embraers managers , so it was natural that the first managers manoeuvre would be directed to safeguard the Embraers operations of financial risks.

Given that, Embraer started a local representative office in Beijing in order to raise its confidence by learning how this odd market works, it is clear that the Embraers executives selected the Uppsala Model to international advance.

According to famous authors as Johanson and Vahlne (1977, cited by Sitkin 2010:188), in addition to Ruzzier (2006, cited by Sitkin 2010:189), Uppsala Model is a concept involving foreign expansion, by means that a company should gradually raise their investment in a foreign market insofar as it can verify that there is an appropriate environment for that.

I.III.

A STRATEGIC ALLIANCE IS SETTLED.

Adopting the strategy of developing the Chinese executive aviation market, Embraer took a further step in 2002 and structured a joint venture with AVIC (Aviation Industry of China), a Chinese company specialized in commercial aviation market, creating a company named Harbin Embraer Aircraft Industry Company (Embraer, 2002). This new joint-venture was licensed by the Chinese government only to assemble and negotiate the ERJ 145 aircraft. The Harbins control is held by Embraer who has 51% of the shares. Its configuration is a functional organization, where the head office in Brazil controls the commercial

procedures of the Chinas joint-venture and opts for which aircraft will be assembled, in this case was the ERJ 145 (Embraer, 2002).

I.III.I. ANALYSIS OF THE DEVELOPED SCALE COMMITMENT IN 2002.

Since Embraer was more confident in Chinese environment it opted to accomplish a horizontal foreign direct investment (FDI) related to the executive aviation market in order to leverage its capacity and obtain higher profit potential. Furthermore the Embraers local presence strengths the influential power of its brand which is the more important aspect in Chinese consumption.

Owing to the lack of Chinese technology to build executive aircrafts, in addition to the complex regulations and the precaution of reducing financial risks through pooling resources, Embraer had to join to a Chinese company called China Aviation Industry Corporation (AVIC) and consolidate a joint venture named Harbin Embraer Aircraft Industry Co. Ltd. (HEAI).

Given the structure above described, it seems that Embraer performed a brownfield investment, insofar as it took advantages over some facilities already available in AVIC and could use a cheap workforce in order to replicate the successful activities managed in Brazil. The risk of eventual duplication of overheads was not a problem, since the intangible assets like intellectual capital and technology were earlier developed and controlled in Brazil.

The problem with the above structure was the similarity between AVIC and Embraer aviation commercial operations, therefore involving competition. Regarding to the HEAIs managerial structure, as Embraers attributions were just transferring the previous possessed method of assembling aircrafts, it is possible recognise a functional configuration with a complementary global approach, inasmuch as there is a fixed range of aircrafts to be offered and there is no room to Harbin deliberately decides its production. In a nutshell, the power was centralized in Embraers head office in Brazil, stressing the push paradigm adopted by the company.
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I.IV.

THE CREATION OF A WHOLLY OWNED SUBSIDIARY COMPANY.

One of the Embraers principal objectives has always been to expand its aeronautical services. Regarding the Chinese market, after ten years of activities, Embraer decided to create a full subsidiary in Beijing named China Aircraft Technical Services Company Ltd. (ECA) in 2010 (EMBRAER, 2010).

The focus was directed to offering specialized services in technical fight operations, logistics and to promote sales of spare parts (EMBRAER, 2010).

I.IV.I. PERFORMANCE APPRAISAL RELATED TO THE BOUNDARIES OF THE FIRM. In order to create value to the company, Embraers executives have implemented a strategy of expanding Embraers operation range in the value chain, broadening its service offers to downstream.

This kind of strategy is a common procedure in various segments and it was developed by Embraer so that the company could capture more added values in the value chain, therefore raising its profit in the Chinese market.

Given that the costs of a greenfield in this case is cheap, since it is a company that renders services, and owing to the know-how in aeronautical technology of its aircrafts, Embraer could maximize its profits by adding complementary services. As a result Embraer created the China Aircraft Technical Services Company Ltd. in 2010.

II.

RECENT PERSPECTIVES.

Nowadays HEAIs situation indicates that its days are numbered. The reason is that the demand for ERJ 145, the only licensed aircraft to be sold in China, has slumped since 2011 (Salek, 2011).

Despite of all Embraers efforts to promote the aircraft, even exploring the actor Jackie Chans image (Maisonnave, 2012), it seems that the brand was not well instilled in the mind of rich Chinese people. Besides, the 2008 crisis culminated in rising fixed costs in aviation market which contributed to reduce the demand for small executive aircrafts, migrating the consumption to commercial aircraft market (Salek, 2011).

One crucial disadvantage of the above joint-venture is that the Chinese government refutes internal competition related to commercial aviation market. This unfair restriction has driven Embraer in considering leaving China.

Nevertheless, after exhausting negotiations, Embraer has recently got from Chinese government the license to produce another executive aircraft named Legacy, which seat capacities outnumber ERJ. In this aircraft is deposited all the Embraers hope to succeed in Chinese aviation market. CHALLENGES AND REFLECTIONS RELATED TO EMBRAERS

II.I.

INTERNATIONAL BUSINESS INTO CHINA. The Embraers adventure in Chinese market was an audacious attempting. Some procedures were not the most indicated, but there isnt a crystal ball in international business. According to the presently situation, i.e. the risk of leaving the Chinese market, it indicates that some mistakes were committed in past. Firstly, the anxious of the Embraers executives to capitalize on Chinese market in short term, disregarding the forecast demand, instead of broadening the range of products.

In reference to the constitution of a joint-venture, it seems to be the best choice as explained previously, but maybe AVIC was not the best company to establish an agreement, since the company is a competitor in the commercial market. As reported by Rajesh Iyer (2009, p 127) when analysing joint-ventures the self-interest of each partner should not lead to potentially destructive direct conflict. In this particular case, it had better a brownfield entry through buying a stack of shares of an existed
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Chinese company, without controlling it. As a consequence, the chances of an urgent manoeuvre would be easier, given the empowering lobby. Furthermore, the merchandise of Embraers aircraft with Jackie Chan was not aligned with the products features. The organizations idea was to familiarize itself into Chinese culture, but the managers forgot that a strategy must be in line with companies offers.

It is possible conclude that in international business, it is interesting to decentralize some power to subsidiaries in order to enable them developing a specific local strategy (glocalization).

In other words, a pull paradigm is better option than a push one, inasmuch as it is easier to capture the commercial signals transmitted by that specific market. The company should introduce a geographic organization in order to response fast to consumers demand and eventually gets a fruitful relationship with Chinese government.

III.

BIBLIOGRAPHY

Bonini, E. (2005). Workshop O caso da Embraer na China. Retrieved date from the World Wide Web: http://www.cebc.org.br/en/node/795.

Bowen, N. and Sitkin, A. (2010). International Business: Challenges and Choices. Oxford: Oxford University Press.

Embraer. (2000). Annual Report 2000. Retrieved date from the World Wide Web: http://ri.embraer.com.br/show.aspx?idCanal=iM2P2p1lloUsWi5mzDbdbA==

Embraer. (2002). Annual Report 2002. Retrieved date from the World Wide Web: http://ri.embraer.com.br/show.aspx?idCanal=iM2P2p1lloUsWi5mzDbdbA==

Embraer. (2010). Annual Report 2010. Retrieved date from the World Wide Web: http://ri.embraer.com.br/show.aspx?idCanal=iM2P2p1lloUsWi5mzDbdbA==

Embraer,

(2012).

(http://www.embraer.com/pt-br/imprensaeventos/press-

releases/noticias/paginas/embraer-e-avic-anunciam-joint-venture-para-fabricar-jatosexecutivos-na-china.aspx),

Iyer, R. (2009). MBA Fundamentals: International Business. New York: Kaplan Publishing.

Maisonnave, F. (2012). Os garotos-propaganda do Brasil na China. Journal Folha de Sao Paulo. Retrieved date from the World Wide Web:

http://vistachinesa.blogfolha.uol.com.br/2012/03/05/os-garotos-propaganda-do-brasil-nachina

Salek, S. (2011). Acordo pode evitar fechamento de fbrica da Embraer na China. Retrieved date from the World Wide Web:

http://www.bbc.co.uk/portuguese/noticias/2011/04/110411_china_embraer_ss_pu.shtml