Embraer vs Bombardier


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Embraer vs Bombardier Harvard Business School case submitted in International Business classs, Amterdam Business School Executive MBA programme, 2013.

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Embraer vs Bombardier

  1. 1. Amsterdam Business School MBA International Business, part-time Assignment week 3, November 11th, 2013 Case: Bombardier: Canada vs Brazil at the WTO [HBS 9-7003-022] Michelle Donovan 10429859 Kivanc Ozuolmez 10429832
  2. 2. Clearly Bombardier’s strategy and the available options under discussion will shape Bombardier’s market position and Canada’s role in the aviation industry in the coming years. As shown in Exhibit 2, the regional jet market is forecasted to grow in the coming 20 years. In addition to Bombardier’s market positioning and expected benefits at the corporate level, the Canadian government andCanadian citizens through employment opportunities and the aviation supply market around Bombardier will enjoy and benefit from Bombardier’s successes now and long into the future.Our assumption is that both the Canadian and Brazilian governments are interested in maximizing domestic welfare.Therefore, the three options under discussion should not only be considered as Bombardier’s issue, but the effects should be evaluated from a wider perspective, for the common (domestic) good.Therefore, whatever the decision is, how much benefit will result, and how the decision is communicated publicly has high importance. If Bombardier goes for option one, and urges the Canadian government to impose trade sanctions on Brazilian imports into Canada, export-related economic issues could be triggered on different export goods on the Brazilian side, and could result inthe Brazilian government taking serious actions to resolve the Bombardier vs. Embraer dispute, and cooperatingwith Canada. The larger the sanctions are for the Brazilian goods, the stronger the effects on the Brazilian economy and the earlier the Brazilian government will be likely to take serious actions. Although the above analysis seems persuasive at first glance, how these sanctions will affect Canada itself, and how the public voice will react, especially from the sectors unrelated to aviation, is uncertain. Goods imported from Brazil, such as leather shoes, coffee and electronic components, are easily replaceable from different countries and suppliers, however, the effects of any sanctions cannot be easily estimated. (The data given in the case is not sufficient to estimate the effects of the sanctions on the Canadian economy, or on individual companies importing Brazilian goods.) It is certainly doubtful as to whether these sanctions, at $344 million CDN annually (p.14), would have enough of an impact on Brazil to force a change in direction. As the common benefits of the sanctions are not fully clear, Bombardier might not be able to convince the Canadian government to apply trade sanctions on Brazilian products. Negotiating the situation with the Brazilian government and Embraer is another option, where success fully depends on what both parties can bring to the table. Currently, Embraer is dominating the market, and driving for a larger market share. In addition to that, Embraer’s position in Brazil, where corporate culture is dominant and the Brazilian government is atrue supporter of Embraer, Embraer is shielded from outside enforcements of the WTO, Canada or Bombardier. Therefore, Bombardier and Canada should offer something very attractive to get the Brazilians to the table and ultimately conclude the negotiations successfully. The negotiation terms are not stated in the case, but we have come up with some options. Bombardier and Canada may suggest ending the competitive fight and instead starting to cooperate, for example by dividing market share by price fixing,or offering similar funding packages. To convince the Brazilians, Bombardier can offer collaborations on some activities, like R&D, or production of common aircraft components, etc. The option to impose sanctions on Brazilian imports is also still open and legally allowed by the WTO so this possibility could also be used as a “threat” in the negotiations. Whether these terms will be enough to convince Embraer and Brazil is not certain, but the outcome is likely to be beneficial for both parties. However,this initiative, by nature, has some
  3. 3. elements of a cartel-like (monopolistic) structure and may result in resistance from theWTO, or further issues being raised with the WTO by other countries and companies which are also aircraft manufacturers and/or purchasers. An aggressive approach, to match Brazilian government subsidies and PROEX financing with the help of the Canadian government, is the third option. Bombardier considers this option the most effective,the quickest to implement and the most advantageous. Through PROEX-like export financing from the Canadian government, Bombardier can offer comparablefinancing and pricing options to potential airlines and purchasers, and thus position itself in a stronger position in the market against Embraer. Price and financing matching is allowed by the rules of the OECD, of which Brazil is not a member, but it is not clear if this price and finance fight is in violation of the WTO’s rules. Even if this practice violates WTO rules, it will give time to Bombardier and Canada to strengthen their market position, and probably the dispute will get higher exposure in the WTO and result in an escalation for permanent resolution. On the other hand, if Canada were to introduce such measures, perhaps Brazil would simply increase its investment in PROEX in order to overtake Canada again, and the results would be an escalation or “subsidy war”. Bombardier thinksthe government’s interest is to focus on the long term effects of support – otherwise thegovernment should be worried about the results of not supporting Bombardier; lost export sales, employment issues, fragility of the supply market around Bombardier, and other different domestic constituencies. But from a timing perspective, as the elections are on the way, politicians will probably hold short term agendas, and focus on the short term effects, especially public opinion about potential support. From experience, the Canadian government knows that any type of support for Bombardier would resonate with both supporting and opposing public voices across the country. The public reaction, especially opposing voices, would be the main concern of the government while heading to the election. As all three options above have their cons and pros, and may result in different outcomes for Bombardier, the Canadian government and the overall regional jet market, we cannot decide which way to go only by looking at cons and pros, and expected outcomes. Therefore, we referred back to scientific research in our reader in hope of finding a direction. The Harvard Business School review (HBS 9-390-001, 1990) refers to the positive externalities argument, “concerned with situations where society could benefit from an action that might be too costly for an individual, rational firm to undertake. …. In such a case, it would make sense for the government to encourage the firm to undertake those activities, even if a subsidy (or protection) was required. The social benefits of the government’s action would outweigh the social costs” (p.4). Therefore we can expect that the Canadian government’s potential support for Bombardier will be beneficial for overall society, and the third option is more likely to offer stronger and wider outcomes. Furthermore there is the profit-sharing argument, that support for Bombardier could improve national welfare. This support could take the form of subsidizing R&D activities or providing “tax relief or subsidies…to increase the profitability of private investments…[such as] expand[ing] production facilities, foreign firms might be discouraged from expanding their own operations. The result would be increased market shares and profits for the domestic firms” (p 4-5).
  4. 4. But then the question arises about managing public opposition to such support. In order to do this, Bombardier should organize campaigns with politicians and government officials, separate from election campaigns,which focus on support and its benefits for the common good. Bombardier should also support election campaigns, maybe even fund (donate to) some political camps to get the government onto its side after elections. As a pluralist economy, the Canadian government is lobbied and pressurized by many different interest groups which have different and conflicting demands, all of which it is expected to consider. In order to “stand out” among all the different groups, Bombardier should invest in corporate political activity (CPA). According to Sean Lux et al, 2011, CPA activity is positively related to firms’ performance and therefore, the political support mentioned above, or a different kind, is likely to help Bombardier to get government support for export financing and subsidies, or for restarting negotiations, or for imposing sanctions. The HBR article goes on to mention that “conditional strategies which offered the carrot of liberalized trade backed up by the stick of retaliation” are the most effective in terms of getting the foreign side to respond with cooperation. Trade liberalization shows much higher gains than trade protectionism (p.9). Murtha &Lenway assert that “Countries are better off…if they cooperate…, refrain from subsidies, and their companies likewise cooperate in a stable oligopoly” (p.122) Therefore our conclusion is that Bombardier should approach the Canadian government after the election to ask them to approach the Brazilian government with the aim of restarting negotiations. We think the Canadian government is more likely to look favorably on this option than the other two, as this will cost them the least amount of money (it does not involve substantial injections of cash) and is the least likely to negatively affect public opinion (again due to money; large sections of the voting public do not want to see more subsidies given to Bombardier, and their reaction to increased prices due to sanctions on Brazilian imports is not likely to be positive either). Also this approach is in line with Canada’s actions in this conflict up until this stage, which have been to “play fair” and involve the WTO at every stage. Furthermore this option does not preclude the use of either of the other two options at a later stage. Should negotiations not be successful, the other options (“stick of retaliation”) are still available, but would involve much more persuasion on the part of Bombardier.
  5. 5. References Case: Bombardier: Canada vs Brazil at the WTO [HBS 9-7003-022] New Theories of International Trade (HBS note 390001) Murtha, T. &Lenway, S. (1994) Country Capabilities and the strategic state: how national political institutions affect multinational corporations’ strategies, Strategic Management Journal, 15: 113-129 Lux, S., Crook, T.R., &Woehr, D. (2011) Mixing business with politics: A meta-analysis of the antecedents and outcomes of corporate political activity. Journal of Management, 37: 223247