Mergers Hit Rail Equipment Sector - What Is The Lesson?

brucewilds.blogspot.hk / By: Bruce Wilds

Chinese-Bullet-Trains On Display

Little noticed by many Americans currently obsessed with an emotional debate as to whether it is acceptable for an NFL football player to kneel during the national anthem an important development is taking place in the rail equipment sector. One vision of the future has people across the world zipping from place to place on high-speed trains. Of course, trains are not yet that big of a factor in America but they may become a bigger player in moving people if the sky grows overcrowded. If this is to unfold the market will most likely be controlled by a few well-entrenched big players. Many industry watchers see the writing is already on the wall, "Get Big Or Die" but that may be a simplification of what we are seeing.

According to the South Morning China Post in an article recently published, China Railway Rolling Stock Corp (CRRC), the merged new entity of China’s two largest train makers, on Thursday announced recent contracts worth 12.2 billion yuan (HK$15 billion), alongside another 4.84 billion yuan deal to supply metro trains to Hong Kong. Among the eight newly-announced deals, only one is for export worth about 440 million yuan, according to the statement on the Shanghai Stock Exchange. CRRC has 90 percent of China's domestic market for the production of railway locomotives, bullet trains, passenger trains and metro vehicles.

CRRC Government Supported And Subsidized

No effort is being made to deny that the impetus for the merger of China CNR Corp and CSR Corp in 2015 was the quest for a deeper push into overseas markets. The company aims to more than double the proportion of exports in its revenues to 15 percent from 7 percent last year. Not only does CRRC benefit from China's growing high-speed network but it also gains from China's ambitions to build an international infrastructure backed trade network under its "Road and Belt" initiative. Clearly, CRRC is catching up on technology with Western peers at the same time it keeps costs under control. Proof of its ability to compete is that it has been able to win by a wide margin nine-figure contracts, such as the supply of metro cars to Boston and LA.

Is This Really A Win-Win for America

Back in the 19th century, 30 pupils from China traveled to the United States as part of an educational mission. One of them was 12-year-old Zhan Tianyou, he is now known as the "Father of China's Railways." Nearly 150 years later, Springfield, the home to 154,000 people, and where Zhan Tianyou learned, will be home to a factory that builds rail coaches as part of CRRC's subsidiary in Massachusetts. The $95 million factory is part of a $566.6 million deal with Boston's transit authority, signed in October 2014, to build 284 rail cars that will replace the aging fleet connecting Cambridge to downtown Boston by 2023.

  

CRRC On A Mission To Expand

Another example of just how powerful a tool China's Road and Belt initiative can be is seen when we view the railway line connecting Nairobi with Mombasa in East-Africa. Projects of this type are typically financed, built, and operated by Chinese firms. CRRC is even building joint and developing ventures with Western competitors. CRRC recently formed a consortium with Bombardier that allows it to compete for the renewal of the New York subways where it appears they are currently in the lead to win the contract that should amount to around $1.5 billion dollars.

With this in mind we turn our eyes towards Europe where, according to Bloomberg News, Siemens AG and Alstom SA are expected to sign off on a merger of their rail equipment activities to create a new European champion. This deal has great appeal for the German and French companies’ shareholders but governance, antitrust and cost-cutting could yet disrupt the journey.

The combined entity would control about 14 percent of the 110 billion euro ($130 billion) rail equipment market but the footprint would vary making it bigger in different parts of Europe.

Whether Europe’s antitrust authorities block it may depend on their reaction to the merger that created the new Chinese rolling stock company, CRRC Corp. which dwarfs its international peers.

Again we see the power a company gains when it is supported, subsidized, or given an unfair advantage driven by its government. The bottom-line is that CRRC's internationalization projects are as ambitious as its research highlighting the goal behind the merger of CNR and CSR was to end the competition between the two Chinese companies on foreign contracts. CRRC has won rail contracts as far afield as Chicago and Kenya. China’s Belt and Road initiative will also bring yet more international business its way. Meaning that the Chinese company's size plus access to cheap finance will let it crush rivals unless they take action. Americans would be wise to pay a little more attention to these mergers and what is happening across the world.


The articles linked below are related to the subject above;
    http://brucewilds.blogspot.com/2016/09/chinas-aviation-industry-quickly.html
    http://brucewilds.blogspot.com/2017/02/free-trade-and-fair-trade-are.html
    http://brucewilds.blogspot.com/2015/05/passenger-rail-must-be-redesigned.html