High-speed China changes rail landscape
By Jamil Anderlini in Beijing
Published: March 16 2010
For decades the high-speed railway sector has been dominated by a handful of companies in Europe, Japan and North America, which have mostly concentrated on projects in their own regional markets.
But just as the industry is witnessing a proliferation of high-speed rail projects across the globe, the rapid rise of Chinese state-owned rail producers is posing a serious threat to the dominance of companies such as Germany’s Siemens, France’s Alstom, Canada’s Bombardier and Japan’s Kawasaki.
“Chinese companies are changing the landscape of the global railway market because of the dimensions of their home market and because they are becoming involved in international tenders, which is new,” said Dominique Pouliquen, Asia-Pacific managing director for Alstom.
In a sign of how competitive the Chinese state railway equipment producers have become, Siemens has abandoned its bid for the second phase of the “pilgrim express” linking the holy cities of Mecca and Medina in Saudi Arabia, and has joined a Chinese consortium instead.
While the Chinese companies are new to the global stage and lag their European rivals in terms of quality and technology, they have some significant advantages.
“Price is their number one competitive advantage and they are very well organised with financing support from Chinese state-owned banks,” Mr Pouliquen told the Financial Times. “They offer a global package, which is usually combining technical solution with financing, so it is very easy for governments to make a decision to use their products.”
The Chinese ministry of railways, which directly owns many rail companies, co-ordinates tenders so they don’t bid against each other, and encourages foreign companies to join Chinese consortia by holding out the prospect of greater access to an enormous market.
Analysts said Chinese companies were already very active in bidding for projects in Middle Eastern countries such as Saudi Arabia and Iran, and Latin American countries including Argentina, Brazil and Mexico.
They are also targeting projects in Australia and the US, and have made significant inroads in their own region, with contracts in Thailand and Hong Kong.
The rise of the Chinese rail industry with its global aspirations has happened quickly.
Iain Carmichael, managing director Lloyd’s Register Rail in Asia, said that as recently as three years ago Chinese companies didn’t have the knowhow for many parts of their own rail systems, such as signalling and high-speed technology, and that provided a huge opportunity for European companies.
“But as the Chinese gained the knowhow, the relationship changed, so now the Chinese have the upper hand and the Europeans now have to work co-operatively if they want to compete,” he said. “Rolling stock products are built cheaper in China than anywhere else and the quality is now at the level where they can sell to global projects.”
He said the main constraint on Chinese exports of rolling stock was capacity, because Chinese producers were trying to keep up with orders at home in what had become the largest market in the world.
“Some big manufacturers are tripling their output this year and we’re seeing a vast expansion of metro systems as well as high speed rail,” Mr Carmichael said.
China’s market for rail equipment, including trains, components, signalling systems and other equipment, is expected to quintuple from an average of $10bn a year in the period between 2004 and 2008 to more than $50bn a year between 2009 and 2013, according to estimates from McKinsey.
This year China is expected to account for more than half the total global expenditure on rail equipment.
The government plans to build at least 30,000km of railway, most of it high-speed, in the next five years and China is soon expected to overtake Russia to have the second-largest rail infrastructure in the world, after the US.
These ambitious expansion plans have been on the books for years but, in the wake of the financial crisis, the government accelerated its build-out to boost growth, moving the target date for completion for many projects from 2020 to 2015.
The size and scale of the Chinese market partly explains why European and international rail equipment providers are scrambling over each other to partner Chinese state producers inside the country and around the world.
But co-operation has come at a price.
“European manufacturers have complained that they have transferred technology to China as required [by Beijing] and now the Chinese are using their technology to compete on price in the international market and even in the European home markets,” said Evan Auyang, an executive at Hong Kong-based Transport International and a former infrastructure consultant at McKinsey.
Chinese regulations for the sector include onerous local content requirements stipulating that 70-90 per cent of rail equipment must be Chinese-made. The official state policy on using foreign rail technology is known as “introduce, digest, absorb then innovate”.
“Around 90 per cent of the technology the Chinese currently are using is derived from their partnerships or equipment developed by foreign companies,” Mr Pouliquen said.