ERJ Embraer SA

By Doug Cameron and Jeffrey T. Lewis 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 6, 2018).

Boeing Co.'s plans to form a defense-focused joint venture with Embraer SA will test whether the two aerospace companies can overcome the Brazilian skepticism toward the U.S. aerospace giant.

Boeing was stunned five years ago when Brazil selected Sweden's Saab AB in a $4.5 billion deal for 36 Gripen fighter jets over its own F/A-18 Super Hornets. Embraer is helping to build the Gripens in Brazil.

Dennis Muilenburg, then Boeing's chief operating officer and now CEO, said at the time that the fallout from the U.S. National Security Agency surveillance program exposed by Edward Snowden had made it tougher for a U.S. firm to win business in Brazil.

The leaks by the former NSA contractor included documents alleging that the U.S. had spied on the communications of Brazil's then president, Dilma Rousseff. "It's created some challenges," Mr. Muilenburg said in 2013.

Resistance to Boeing among some Brazilian lawmakers and military leaders has stiffened since The Wall Street Journal reported last year that the company wanted to partner with Embraer, the backbone of the country's homegrown defense industry.

Workers have protested the potential partnership outside Embraer factories, and politicians have denounced the deal ahead of presidential elections scheduled for October.

"I'm going to take back Embraer," center-left populist Ciro Gomes, who ranks third in most polls, told a Brazilian newspaper in March. Front runner Jair Bolsonaro has backed the partnership as a means to open up Brazil's economy.

Keeping Embraer in charge of the military side of the business is key to winning political support for the proposed deal it struck with Boeing that would put the U.S. company in control of Embraer's commercial plane-making operations, according to Embraer executives and Brazilian lawmakers.

Defense accounts for around a third of Embraer's revenue, with products including the Super Tucano turboprop, a popular choice among smaller countries seeking attack and surveillance aircraft.

Embraer executives said Thursday that the Brazilian company would retain control of a proposed military joint venture with Boeing after the two companies conclude the partnership on commercial jetliners. Boeing didn't expand on Embraer's comments.

Embraer said the new venture with Boeing would focus on the KC-390, a new military transport jet due for delivery to Brazil's Air Force later this year. Boeing is helping to market the KC-390 through an existing partnership. Embraer said on an investor call that it envisaged a deeper alliance that could help foster sales of the jet to the Pentagon and other overseas customers.

"We believe that a more robust partnership with joint investments for the KC-390 exports could also unlock significant value for our shareholders," said Chief Financial Officer Nelson Krahenbul Salgado.

Mr. Salgado said adding research and engineering capabilities to the proposed partnership could help the jet compete against the C-130J turboprop made by Lockheed Martin Corp.

Embraer said the proposed defense joint venture could be extended to research of other products as well bolstering supply chains.

Analysts said an alliance that starts with the KC-390 could be expanded to include work on Saab's Gripen fighter. Boeing and the Swedish firm already cooperate on the T-X, the U.S. company's entry for the upcoming $5 billion contest to build a new training jet for the U.S. Air Force.

Boeing could use its own supply-chain clout to help Saab and Embraer build the Gripen.

"If Boeing could get the Gripen price down, it would make a terrific product to sell,' said Richard Aboulafia at the Teal Group, an aerospace consultant.

Saab didn't immediately respond to requests for comment.

Write to Doug Cameron at doug.cameron@wsj.com and Jeffrey T. Lewis at jeffrey.lewis@wsj.com

(END) Dow Jones Newswires

July 06, 2018 02:47 ET (06:47 GMT)

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