A little more than a decade ago, the same company had been in desperate straits after 10 years of losses. Embraer’s comeback is a case study in how many top emerging companies have gone to the brink in a fiercely competitive business environment–and survived stronger because of it.
During the late 1980s, its turboprop planes were rapidly losing their popularity after earlier capturing nearly half the U.S. commuter market. An expensive new joint project with Argentina to build a pressurized propjet became a white elephant when not a single plane was sold. On top of that, a civilian administration had taken over from a military that had long looked upon the planemaker as its pet project, inflation in Brazil had skyrocketed, Embraer’s sales had dropped 80 percent and it had lost out to European competition in its bid for a jet trainer for the U.S. Air Force.
In desperation, the company slashed its work force in half, and its proud engineers even stooped to turning out mountain bikes. It could only look on jealously as Bombardier in Canada became wildly successful by stretching out its existing business-jet design into a new regional commercial jet to replace its noisy and low-flying turboprops. But then Embraer turned a near-fatal problem into a competitive edge: it had no older jet to reconfigure. What it did have were lots of highly trained, eager (and less expensive) engineers (25 percent of its work force) from the Instituto Technológico de Aeronáutica in its own backyard. Unburdened by legacy thinking, they quickly designed the ERJ-145, which had more-modern avionics, was 1.8 metric tons lighter than its competitor, $3 million cheaper and 14 percent less expensive to operate. Introduced in 1996, the new jet quickly found its first anchor customer in Continental Express, and in three years the company sold 300 planes, as many as Bombardier had sold in seven. Today, Embraer is the fourth largest plane maker in the world, while its competitors in Japan, Britain and the Netherlands have gone bankrupt.
Embraer is innovative not just in design but also in marketing and production. It introduced a new series of roomy regional jets a few years ago intended to fill a hole in the market left by Boeing and Airbus. Rather than being a supplier to Boeing, its production model turns outsourcing upside down by designing, integrating and assembling new planes in its huge hangars in Brazil with avionics and engines from U.S. suppliers, titanium plates from Russia, wing stubs from Japan and fuselage parts from Western Europe. This web of suppliers keeps investment down and provides maximum flexibility.
Of course, emerging multinationals need to keep climbing the value ladder or new entrants will compete with them just as they have with the more traditional multinationals. For example, China recently announced its intentions to start building regional jets in the same seat-capacity range in which Embraer has excelled.
Embraer is not the only emerging blue-chip company that has had to struggle against difficult environments. In 1985, Morris Chang was lured to Taiwan after a 25-year career with Texas Instruments to head a large research institute but, initially against even his better judgment, became the founder of TSMC, the world’s largest independent logic semiconductor wafer maker in a daring move by the island to catch up. “We were two generations behind in technology, had no clients lined up and simply had no actual product to sell,” Chang told me. “Even Gordon Moore [the cofounder of Intel who coined Moore’s Law] thought that the concept of a pure foundry was a bum idea.”
Again, a crucial innovation was born in desperation. TSMC created two new models for technology: independent chip makers and “fabless” design houses, each of which could better withstand the brutal cycles of the industry. Today, TSMC is the world’s most efficient chipmaker, according to Chang, and in some areas, notably immersion technology, it is ahead of IBM and Intel.
A similar story of success in defiance of conventional wisdom was engineered in Brazil by Erling Lorentzen, a Norwegian with a Harvard Business School degree, who “unbundled” the pulp industry into two tasks (making the raw material, pulp, and the final product, paper). When he founded independent pulp maker Aracruz, no one wanted to believe that fast-growing eucalyptus wood (long considered “filler” pulp) was, in fact, more versatile in papermaking than slow-growing pine from the Northern Hemisphere.
Another Taiwanese company, High Tech Computer Corp. (HTC), recognized several years ago that computer laptops were becoming a low-margin commodity. After the initial success of the Palm Pilot, it also knew that traditional leaders Microsoft, Intel and Sony were itching to get into this business but that their products for this market had failed to catch on. HTC designed a stylish device, later called the iPaq, using Microsoft’s operating system, a special Intel chip and Sony’s TFT-LCD screen. Combining three “losing” products, HTC designed for Compaq (later HP) a smash hit that briefly became the world’s best-selling PDA and later catapulted HTC into a top maker of sophisticated smartphones and wireless PDAs.
Luck occasionally plays a role. Samsung’s “break” in semiconductors came when a U.S. antidumping suit against Japanese chipmakers overlooked the then tiny player and gave the South Korean company the space to stumble into the production of a new memory chip, the 256K DRAM (dynamic random access memory) semiconductor, which would become the staple memory for PCs. Today, not only is Samsung Electronics the world’s largest maker of DRAM chips but also of NAND (“flash”) memory, used to hold photographs, movies and songs in cameras, MP3 players, smartphones and other products.
Of course, stumbling into innovation is nothing new. In 1928, Alexander Fleming saw the lifesaving properties of an ugly mold that consumed bacteria, and invented penicillin after other famous researchers had turned away in disgust and disappointment. And everyone knows 3M’s yellow stickies that became so useful by flunking more-demanding glue tests, but only after someone thought about using them for a different purpose. The new blue-chip firms have managed to find room in their business strategies for serendipity.
