Analyze How Embraer Has Structured Itself Economics Essay

Analyze How Embraer Has Structured Itself Economics EssayThis musical theme forget snap on the commercial aircraft industry. The report will analyze how Embraer has structured itself and gained competitive reward in smaller end segment of the aircraft industry and then the abstract of appeal of neat of Embraer will be projected.The commercial aircraft industry has faced a tough times in recent old which resulted in failures, mergers and joint ventures. The aircraft industry has faced a lot of competition from two of the giants Boeing and Airbus which have dominate the whole aircraft market place and has maximum market shargon. These two giants have huge pool of investment, better root and government support and because of that they argon dominating the aircraft market. All these companies see the menses business env campaignment possessing the ch all(prenominal)enges of a weak globular economy and consume due to the economic turmoil, game and unstable fuel costs, and lack of foreign investments.brazil nut PEST FrameworkPoliticalFederal Republic framework which is similar to that of unite States of America. The federal republic has three independent branches independent branches executive legislative and judicial. The President heads the executive branch.The increase divergence amid US and brazil-nut treeian foreign policy creates high geopolitical take a chance. This will incline to increasing confrontations between the US and Brazil and the continued surrender of foreign direct investment.The main informant of violence in Brazil is criminal rather than political. Personal security is poor as at that place is an extremely high step of criminal activity in major cities. Police fails to assure preventative for citizens as well for business.Brazilian legal system is not very effective and has several faults in them.Honest government is also a big problem in Brazil for ex. the imp individuallyment of a motive Brazilian president Mello i n 1992 who have been involved in an extortion scheme, and the current corruption s green goddessdal of the opinion party of Lula.In streamlined government policies towards economic development of a country for ex. continuous budget deficit, minus net income, high external debt, etc.Poor and inefficient public health and safety conditions sister mortality and mal-nutrition ar the leading reasons.Inefficient education system both lack of quality and metre are the main issues and government is not paying untold attention towards this issue.political science regulations favour the nonage shareholders.Government policies towards globalisation and openness 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 position in the world. The flash rate in Brazil is 4.2% which has decreased from 5.9% in 2008. Major export products incl ude aircraft, electrical equipment, automobiles, ethanol, textiles, 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 sort out of four emerging economies called the BRIC countries.Economic environment tranquillize considered volatile as compared to more(prenominal) stable economies. composite plant tax revenue policies and regulations.Multiple taxes affecting business plans and increasing risks of contingencies.Considerable bureaucratic rules and regulations for reliable businesses and industries.High demand for investments in the distribution channels and infrastructure.Difficulties in reorganizing companies quickly, including high costs for employee terminations.Lack of local financing match with high real inte loosening rates.Economic growth risks are high. Private consumption will be constrained by high unemployment and continued erosion of real earnings.The risk of a significant decline in foreign exchange reserves is high because of the economic turmoil.Investment risk in Brazil is a good deal higher than generally perceived.High public debt exposed to domestic interest-rate trends and maturity that is still withal shortLack of investment in infrastructure building.SocialThe culture of Brazil is very much similar to that of Portuguese culture. The official 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 unskilled 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 necessary 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. Sec tors like bio fuels, agricultural enquiry, remote sensing and aircrafts manufacturing Brazil operate as a global leader. Government put more emphasis on the development of research labs and innovation and RD in these particular sectors to foster growth and development.Overall adventure opinion of BrazilPositiveBrazil has abundant natural resources.Fiscal and monetary policy has been prudent and realistic.house servant 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 inherent macroeconomic equilibrium.Size and potential of the domestic market.Broad industrial base and a diversified economy.Government policies favoured globalisation.NegativeExternal financing ask are too great in comparison to up-to-dateness earnings due to the debt amortisation burden.Socio-political obstacles to necessary structural reforms (educ ation, social security, job market, taxes, regulations)Lack of investment in energy, rail, road, port, and airport infrastructureExposure 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 spill is very high because of huge investment and high specialised equipme nts.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. on that point is not much differentiation between the players and their products hence, there is much price competition.Threat of new EntrantsEnter into aircraft manufacturing market is very tough because it requires huge capital investment and acquaintance of technical know-how.Cost advantages of big players like Boeing and Airbus because they have enormous experience and knowledge about the industry.These two giants have prevail the entire aircraft industry and they also have strong check off loyalty of their products because they are the best in the business.They have a proper network of loyal provider and distributor for their products and long term after sales service contracts.Threat of substitutesNo immediate substit utes are present for aircraft manufacturers.The players and their products in the industry are substitutes of one another.Bargaining world-beater of CustomersThe bargaining power of customers is relatively low in aircraft industries because most of the buyers in the aircraft industries are government of different countries and some 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 intense 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 nee ds huge investments and high class technology the forward integration is very low or unrealistic for the suppliers.According to this analysis the main components which are needed to contest 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 painsCountry Factor The Brazilian government has had a strong affect on Embraer. As mentioned, the party 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 doll ars. Embraer focuses on business growth, solid corporate culture, and strategic partnership to operate globally and market analysis before entering 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. designing 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 key technologies that it can effectively produce in house. It has outso urced the production of components that other companies can manufacture more efficiently. Embraer trains its engineers, not only in aeronautics, 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 why 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 rum 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 equity and cost of debt.Cost of righteousnessThe minimum rate of return that a firm offers to its shareholders is called cost of equity.FormulaCost of equity = Ri sk free regularise + beta (Mature commercialise Premium) + Country Risk PremiumFirst to calculate Beta for EmbraerAverage Beta = 1.19Market D/E Ratio = 22.94%Tax Rate = 20.05%Unlevered Beta = 1.00Cash/ Firm range = 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 nonpayment Spread (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 componentmultiplied 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%