Analyze How Embraer Has Structured Itself Economics Essay

Analyze How Embraer Has Structured Itself economicals EssayThis paper will focus on the commercial aircraft attention. The report will analyze how Embraer has integ straddled itself and gained competitive advantage in depleteder end segment of the aircraft diligence and then the analysis of terms of smashing of Embraer will be projected.The commercial aircraft constancy has faced a grueling times in recent past which resulted in failures, mergers and joint ventures. The aircraft industry has faced a lot of competition from cardinal of the giants Boeing and Airbus which hurl dominated the whole aircraft grocery and has maximum market sh are. These two giants have huge pool of investment, better infrastructure and government support and because of that they are dominating the aircraft market. All these companies see the current business environment possessing the challenges of a weak global economy and request due to the economic turmoil, mellow and coseismic fuel costs, and lack of foreign investments.brazil nut PEST FrameworkPoliticalFederal Republic framework which is similar to that of United States of America. The federal republic has 3 independent branches independent branches executive legislative and judicial. The President heads the executive branch.The increasing divergence between US and Brazilian foreign policy creates high geopolitical risk. This will lead to increasing confrontations between the US and Brazil and the continued decline of foreign direct investment.The main source of violence in Brazil is criminal rather than political. Personal security is poor as there is an extremely high rate of criminal activity in major cities. police force fails to assure safety for citizens as well for business.Brazilian legal system is not really effective and has several faults in them.Honest government is alike a big problem in Brazil for ex. the impeachment of a former Brazilian president Mello in 1992 who have been involved in an extor tion scheme, and the current corruption scandal of the ruling party of Lula.Inefficient government policies towards economic development of a nation for ex. continuous budget deficit, negative net income, high foreign debt, etc.Poor and inefficient public health and safety conditions infant mortality and mal-nutrition are the leading reasons.Inefficient education system both lack of quality and quantity are the main issues and government is not paying much attention towards this issue.Government regulations favour the minority shareholders.Government policies towards globalisation and nudity to market had favoured exports.EconomicBrazil is considered to be as the worlds tenth largest economy and one of the largest economies of South .Its GDP (PPP) per capita is $10,200, putting Brazil in the 105th commit in the world. The inflation rate in Brazil is 4.2% which has decreased from 5.9% in 2008. Major export products include aircraft, electrical equipment, automobiles, ethanol, te xtiles, footwear, iron ore, steel, coffee, orange juice, soybeans and corned beef. The country has been expanding its presence in international financial and commodities markets, and is one of a group of four emerging economies called the BRIC countries.Economic environment still considered volatile as compared to more stable economies.Complex tax income policies and regulations.Multiple taxes affecting business plans and increasing risks of contingencies.Considerable bureaucratic rules and regulations for certain businesses and industries.High demand for investments in the distribution carry and infrastructure.Difficulties in reorganizing companies quickly, including high costs for employee terminations.Lack of local financing coupled with high real interest rates.Economic growth risks are high. Private using up will be constrained by high unemployment and continued erosion of real earnings.The risk of a significant decline in foreign change over reserves is high because of the economic turmoil.Investment risk in Brazil is much higher than generally perceived.High public debt exposed to domestic interest-rate trends and adulthood that is still too shortLack of investment in infrastructure building.SocialThe culture of Brazil is very much similar to that of Portuguese culture. The decreed language of Brazil is Portuguese which is spoken by almost all of the population.Important cultural customs, including a different perception of the due diligence process.Semi-skilled and incompetent labor in certain developing areas.Unequal distribution of wealth a significant portion of the population not participating in the consumer market.Socio-political obstacles to needed structural reforms (education, social security, job market, taxes, regulations).Technological In Latin America, Brazil is a leading nation in the field of science and technology. Sectors like bio fuels, uncouth search, remote sensing and aircrafts manufacturing Brazil operate as a global lea der. Government put more emphasis on the development of research labs and groundwork and RD in these particular sectors to nurture growth and development.Overall Risk Assessment of BrazilPositiveBrazil has abundant natural resources.Fiscal and monetary policy has been prudent and realistic.Domestic market potential and low labour costs have continued to attract foreign investors.The current level of growth foster Brazilian companies to be competitive.Strong international financial support.Policy of maintaining fundamental macroeconomic equilibrium.Size and potential of the domestic market.Broad industrial base and a diversified economy.Government policies favoured globalisation.NegativeExternal financing needs are too great in comparison to currency earnings due to the debt amortisation burden.Socio-political obstacles to necessary structural reforms (education, social security, job market, taxes, regulations)Lack of investment in energy, rail, road, port, and airport infrastruct ureExposure to fluctuations in world prices for certain staple commodities.Economic environment still considered volatile as compared to more stable economies.Complex tax policies and regulations.Improper financing regulations.Commercial Aircraft Industry AnalysisEmbraer is now the worlds third largest aircraft manufacturer they had gained competitive advantage by creating cost- efficient and innovative aircrafts in the lower end segment.Competitive rivalry among existing playersThe competitiveness in the aircraft industry is very high but the competition is not very fierce because most of the market is shared between Boeing and Airbus and rest is with Embraer and Bombardier.The aircraft industry is truly a global industry so each of the manufacturers has to think globally.Barrier to exit is very high because of huge investment and high specialised equipments.Boeing and Airbus had gain market share from each other using prices, product design, advertising, and direct selling efforts . Due to the intensity of the rivalry among Boeing and Airbus, the profits are shared.The industry is technically very sound i.e. there is not much differentiation between the players and their products hence, there is much price competition.Threat of novel EntrantsEnter into aircraft manufacturing market is very tough because it requires huge capital investment and knowledge of technical know-how. make up advantages of big players like Boeing and Airbus because they have enormous experience and knowledge about the industry.These two giants have dominated the entire aircraft industry and they also have strong brand loyalty of their products because they are the best in the business.They have a proper mesh of loyal supplier and distributor for their products and long term after sales service contracts.Threat of substitutesNo immediate substitutes are present for aircraft manufacturers.The players and their products in the industry are substitutes of one another.Bargaining berth of CustomersThe talk terms power of customers is relatively low in aircraft industries because most of the buyers in the aircraft industries are government of different countries and nigh private airlines.Aircrafts are very expensive commodities and show high in cost when switching aircrafts because of that the bargaining power is low in aircraft industry.But because of trigger-happy competition between Boeing and Airbus the bargaining power of buyers is moderately higher between these two companies otherwise its relatively low in terms of industry.Bargaining power of SupplierThe aircraft industries is dominated by two big giants Boeing and Airbus and they are such big companies that they have more bargaining power than their suppliers so because of this reason the bargaining power will be low in the aircraft industry.The aircraft industry needs huge investments and high class technology the forward integration is very low or impossible for the suppliers.According to this analysis the main components which are needed to compete in aircraft industry are global strategy, cost effectiveness, innovative and high class technology and huge capital.Core Competencies of Embraer which helps them to compete in Aircraft Industry earth Factor The Brazilian government has had a strong affect on Embraer. As mentioned, the company was founded by the government in 1969. Before its privatization in 1994, Embraer had established several partnerships abroad and was very focused on exporting its aircraft to new markets. The government does have strategic power and has ability to refuse certain decisions.Global Strategy Embraer has proven itself a truly global company in many ways. Embraer has more than 90% of its sales outside Brazil. It has a worldwide operation network. It has appeased global investors because it deals mostly in US dollars. Embraer focuses on business growth, lusty corporate culture, and strategic partnership to operate globally and market analysis before ent ering a new market.Economies of scale Embraer is proved to be a very efficient company in the aircraft industries because Embraer recognises that China has skilled cheap labour and technology intensive manufacturing centre so they have opened their research hubs and manufacturing units in China. Embraer has been able to design common platforms for its aircrafts with superior performance capabilities which helped them to compete in the aircraft industry and now they have become the worlds third manufacturers and they have overtook Bombardiers in several aspects.Innovation Embraer has focused its RD on the development, systems engineering and integration of the more than 28,000 parts and components that make up an aircraft. Embraers strategy has been to focus its RD funds on chance on technologies that it can effectively produce in house. It has outsourced the production of components that other companies can manufacture more efficiently. Embraer trains its engineers, not only in aer onautics, but also in market research and finance, allowing a broader understanding of the industry.Determined Approach Embraer has very determined company they are very much determined of what they are doing and thats wherefore they have succeeded to gain market share from their competitors like Boeing and Airbus.Embraers ability to continually and successfully forecast future global demand and its ability to meet that demand in unique and innovative ways will be the keys to its future success.Cost of Capital Analysis of EmbraerCost of capital is the minimum required rate of earning or the cut off rate for capital expenditure. Soloman Ezra.To calculate cost of capital we have to calculate cost of law and cost of debt.Cost of comelinessThe minimum rate of return that a firm offers to its shareholders is called cost of equity.FormulaCost of equity = Risk assuage Rate + Beta (Mature grocery store Premium) + Country Risk PremiumFirst to calculate Beta for EmbraerAverage Beta = 1.1 9Market D/E Ratio = 22.94%Tax Rate = 20.05%Unlevered Beta = 1.00 cash in/ Firm Value = 7.90%Unlevered Beta corrected for cash = 1.09To calculate Levered Beta the formula isLevered Beta = Unlevered Beta (1 + (1- tax rate) (D/E ratio)= 1 (1+ (1-.2005) (.2294))= 1.18.Risk free Rate = Market Interest Rate Default fan out (Brazil)= 8.75 2.60= 6.15%Equity Risk Premium Brazil = 4.79% * 25.83% / 15.27= 8.10%Country Risk Premium Brazil = 8.10% 4.79%= 3.31%Cost of equity = Risk free Rate + Beta (Mature Market Premium) + Country Risk Premium= 6.15 + 1.18(8.10) + 3.31= 19.01%Cost of Debt(Rf + credit risk rate)(1-T), where T is the corporate tax rate and Rf is the risk free rate.Cost of debt Emerging Market company After Tax= Riskless Rate + Country Default Spread + Company Default Spread (1-T)= (6.15 + 2.25 +2.60) (1- .2005)= 8.79%Sovereign Bonds of Brazil = 2.25Corporate Bonds of Brazil = 2.60Country Rating of Brazil is Baa3.WACC CalculationThe WACC equationis the cost of each capital comp onentmultiplied by its proportional weight and then summingWACC = E/V * Re + D/V * Rd * (1- T)WhereRe = cost of equityRd = cost of debtE = market value of the firms equityD =market value of the firms debtV = E + DE/V = percentage of financing that is equityD/V = percentage of financing that is debtT =corporate tax rate = 20.05%Market Value of Embraers Equity = 5970531 Brazilian Real for year 2008.Market Value of Embraers Debt = 6990127 Brazilian Real for year 2008.V= 12960658 Brazilian RealWACC = 5970531/12960658 * 19.01 + 6990127/12960658 * 8.79 * (1- .2005)= 10.71%