Daily Memo: Why Embraer Has Been Cleared For Takeoff In China

Embraer has waited patiently for its chance in China ... very patiently.

Back in 2011 at the Beijing Airshow, then-Embraer China President Guan Dongyuan said, “We have full confidence that Embraer’s commercial jets, with versatile business models and right-sized seat capability, will satisfy the demands of this market.”

Fast-forward to 2023, and Embraer still only has a tiny 2% share of the world’s second-largest commercial aviation market. The Airbus-Boeing duopoly—and more so Airbus these days­—continues to dominate the Middle Kingdom’s skies. Even would-be national champion Comac slightly edges out Embraer with a 2.2% market share.

Yet chances are that Embraer’s fortunes in China are set to improve, buoyed by a convergence of favorable commercial and geopolitical trends. As Aviation Week noted in August, China’s decision to certify the E195-E2 is significant—a sign that in the years ahead the narrowbody aircraft will figure into Beijing’s broader civil aviation strategy along with the E190-E2, approved at the 2022 Zhuhai Airshow.

Embraer is increasingly sanguine about China, as seen in its Market Outlook 2023 published in June. In that report, the Brazilian company forecasts that over the next two decades, revenue per kilometer (RPK) growth rate in the Asia-Pacific including China (APAC) region will be the highest of any region at 4.4%. Embraer also predicts that APAC will account for 25.8% of global jet deliveries, second only to North America.

Embraer aims to cultivate a niche in an increasingly mercurial business environment for commercial aviation, one in which calls for self-sufficiency are growing louder as ties with the West fray. Following the debut commercial flight of the C919 in May, the state-owned Beijing Daily opined, “We finally broke the West’s aviation monopoly.” 

Fortunately for Embraer, Brazil is geopolitically neutral in China’s eyes—a fellow BRICS country and member of the Global South that shares some of Beijing’s antipathy toward the advanced economies that make the rules in international affairs and seeks a larger role for developing countries on the world stage.

“The steady growth of strategic partnership between China and Brazil will contribute to the establishment of a just and equitable new international political and economic order,” China’s Foreign Affairs Ministry says on its official website. “China places great importance on its friendly relations of cooperation with Brazil and views such relations as a concrete expression of South-South cooperation.”

The first clear sign that Embraer’s patience in the China market would pay off soon came in April during Brazilian President Luiz Inacio Lula da Silva’s state visit to the country. Beijing and Brasilia released a joint communique on April 14 which said “both parties recognized the importance of strategic exchanges between the two countries in the aerospace sector” and “welcomed the partnership between Embraer and Chinese airlines.”

Ties between Beijing and Brasilia were not strained per se during the presidency of conservative populist Jair Bolsonaro (2019-22), but Lula’s left-leaning politics and ambivalence toward the U.S. better align with China’s worldview. During his visit to China, Lula lambasted the U.S. dollar’s paramountcy in global trade and accused the International Monetary Fund of “asphyxiating countries’ economies.”

The People’s Daily, the official newspaper of the Chinese Communist Party, said in an April editorial that the U.S. has “turned it [the dollar] into a tool to bleed other countries by collecting seigniorage revenue.”

Brazil’s support will be crucial to China as it tries to transform BRICS into a competitor of the G7 with a common currency of its own. Lula said in April that he supports creating a common BRICS currency in the same vein that Europeans created the euro.

At the same time, commercial trends in China’s aviation market favor Embraer. Beijing wants to increase the international connectivity of airports in second and third-tier cities—particularly with Southeast Asia. With a maximum of 146 seats, the E195-E2 can serve that purpose.

The Embraer jets also do not compete directly with Comac’s smaller ARJ21 or larger C919, a point highlighted in an August press release by Arjan Meijer, president and CEO of Embraer Commercial Aviation. The Brazilian company’s jets offer “complementary capacity to China’s indigenous ARJ21 and C919 aircraft,” he said.

Embraer has wisely made its potential construction of a final assembly line in China contingent on adequate E2 orders while shopping around to see if India—another important future market for the Brazilian company—can offer more attractive terms.

While New Delhi has big ambitions for its aviation sector, China needs the investment more. Manifest economic travails and the Communist Party’s growing focus on national security have shaken the confidence of multinational companies in China. China received just $4.9 billion in foreign investment in the second quarter, the lowest level in 25 years. U.S. Commerce Secretary Gina Raimondo channeled corporate frustrations when she told her hosts in Beijing last month that American companies have complained to her that China is becoming “uninvestible.”

If China can agree a deal with Embraer for a final assembly line, it will be able to better combat that narrative while putting some teeth into its lofty proclamations about the shared interests of itself and Brazil.

For its part, Embraer is poised to make inroads into the APAC region, with China as a key growth market. Conditions are ripe for what Chinese leader Xi Jinping would describe as “win-win cooperation.”