Econ problem set 4

Econ problem set 4 - Siddharth Joshi Global Econ 8a...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Siddharth Joshi Global Econ 8a Economics Problem Set 4 1. a. In response to Mrs. Chan’s question I would say that he subsidies to Embraer by the Brazilian government are the key cause of the declining market share. Because of the subsidy, the cost to Embraer to make planes go down low, and they can keep the same profits and lower their prices or keep the same prices and have large profit margins. The Brazilian governments subsidy towards Embraer were estimated to be $2.5 million/aircraft sold. This is a huge advantage for Embraer over Bombardier and is competing against such a huge subsidy. Yvan Allaire, executive vice president estimated that due to the Brazilian subsidies Bombardier had lost over 400 jet orders since 1996, sales which would have created 4400 jobs. The subsidized interest rate of PROEX’s financing subsidies were 3.8% less than the market rate along with a 15-year back back term. This is the main reason that Bombardier’s market share fell from 53% (1996) to 34% (2000) and Embraer’s grew from 26% (1996) to 53% (2000). The Brazilian government also took $700 million of Embraer’s debt and recapitalized another $530 million of it and allowed partial payment of bonds to allow trade at 50% of the face value, causing great money flow giving Bombardier a disadvantage and Embraer and advantage. Also alternatively, because airlines often have weak balance sheets, the financial assistance and long pay back term may have attracted customers to Embraer or maybe Embraer’s marketing could have been better than Bombardier as Embraer was a symbol of pride for Brazil. b. Bombardier, in response to the Brazilian subsidies had a few strategies. They themselves hired an international DC based law firm to present to the Canadian government and position them as an ally. Allied, they had 3 strategies. One of the strategies was to approach the Canadian government and persuade them to subsidies Bombardier the same way the Brazilian government subsidizes Embraer. With this equalization, Bombardier could once again grow to capture majority of the market-share. This subsidization will put Bombardier on the same playing field as Embraer and they would be able to compete equally. Both companies being subsidized, the airplane companies would both gain, helping Bombardier and their customers. The disadvantage of this is just like Embraer, Bombardier may get in trouble with the WTO, and it would be a lot of money for the Canadian government to part with regularly. The second option was to go along with the Canadian government and impose WTO based sanctions or
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 4

Econ problem set 4 - Siddharth Joshi Global Econ 8a...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online