Brazilian jetmaker Embraer SA secured a contract for more than $400-million for equipment to monitor Brazil's borders and has turned its attention to the coastline, as it considers expanding into building navy patrol ships, the company said on Monday.
The new defence ventures are part of Embraer's push to supplement its flagging commercial and private aviation business with new revenue from Brazil's growing military budget.
The latest step in that direction is the contract, worth 839-million reais ($403-million U.S.), to supply the Brazilian army with radar and other surveillance equipment during the first phase of a security program along 650 kilometres of border with Bolivia and Paraguay.
Brazil plans to expand surveillance to more than 16,000 kilometres of land border, marking a strategic shift for a country whose economic rise has increased a flood of drugs, illegal immigrants and other contraband.
Oil discoveries off the Brazilian coast have also spurred heavy spending on the country's naval fleet, and for the first time Embraer expressed public interest in meeting that demand.
"If we manufacture planes, why not ships?" Luiz Carlos Aguiar, the head of Embraer's defence unit, told newspaper O Estado de S. Paulo in an interview published on Monday.
Embraer has its eyes on a program to renew Brazil's naval patrol vessel fleet for an estimated $844-million. The military has ordered seven of a planned 27 ships from other firms so far.
"The company is still modelling the shipbuilding program," an Embraer spokesman told Reuters, confirming the details of the interview. "We do not have a timetable yet for the announcement of a partner in that program."
Embraer's push into the broader defence market comes as the world's largest weapons makers struggle with dwindling military budgets in the U.S. and Europe. Boeing said earlier this month it would consolidate its defence and security units as part of efforts to cut $4-billion in costs.
Brazil currently spends about 1.6 per cent of its gross domestic product on defence. Military spending makes up more than 4 per cent of GDP in Russia and the United States, according to the Stockholm International Peace Research Institute.
Some analysts have said Embraer's focus on defence could be a reaction to plunging orders for its market-leading regional airliners and cancelled private jet orders that are endangering delivery targets for the second straight year.
Embraer shares fell 2.4 per cent in Sao Paulo trading to 14.04 reais, while the benchmark Bovespa stock index lost 1.6 per cent.
With the Brazilian border contract, Embraer received a quick payoff for a string of acquisitions over the past two years.
Embraer's newly created surveillance unit Savis and the recently acquired OrbiSat will supply the pilot program through the consortium known as Tepro.
Embraer expects the border security program, known as SISFRON, to cost around $4-billion over 15 years. Mr. Aguiar, the head of Embraer's defense unit, told Reuters in March that if the company won the full contract, about 60 to 65 per cent of its value would go to Embraer and its partners, with the rest subcontracted to outside suppliers.
The company expects security and defence to generate a quarter of total revenue by 2020, up from an estimated 14 per cent last year and less than 5 per cent in 2006.
Defence revenue in the third quarter grew the fastest of Embraer's business units from a year earlier, contributing to stronger profit margins.