These days nothing stands still for very long in the world of business. Forty years ago the companies manufacturing railway rolling stock – including trams and metro cars – were names that had been familiar for decades, and there was usually a particular geographical relevance, not just between different countries, but also between the different regions within them. EU tendering rules were barely off the ground, so the local factory of the traditional local manufacturer often won the order.
The creation of a true common market in Europe, and the increasing internationalisation of the manufacturers through mergers and acquisitions, changed all this. No-one, apart from a few left of centre politicians, cared much any more where their trams came from; the order went to the manufacturer offering the lowest price that met the specification, even if the finished product had to be sent halfway across Europe. As the manufacturers grew, with more facilities at their disposal, specialisation came to the fore with the final assembly plant putting together mechanical and electrical parts from a number of different factories. And the electrical equipment became a much more significant part of the total than when two controllers and four motors were all that were needed.
With North America fast becoming a growth market for LRVs, the Buy America protectionism legislation caused international manufacturers to wonder how they might compete, even though their products were often technically more advanced than the few surviving domestic products (which soon disappeared, the dreadful Boeing-Vertol LRV being the last gasp). The answer was of course to set up a local manufacturing base, a seemingly expensive solution that had to be absorbed into the price of the products for a while. But if your competitors have the same cost base, perhaps it does not matter (although the high cost of US LRVs cannot be blamed entirely on superior buff-strength requirements).
So names we are familiar with today –Alstom, AnsaldoBreda, Bombardier, Siemens et al – have a multi-faceted history. Of course once a market becomes the dominant territory of a few manufacturers, new companies will emerge to challenge them; some will make a success of it, living off their ability to offer shorter delivery times and keener prices thanks to lower overheads. Our annual rolling stock orders survey (see TAUT 928) has in recent years introduced names such as CAF, Pesa, Solaris, Stadler and Vossloh, which may have long histories but were not so relevant to vehicle manufacture until recently.
However Vossloh has already decided on a course to divest its rail vehicle interest, either in its entirety or in parts, by 2017 as it restructures around a core business of track products and infrastructure activities and focuses primarily on four defined markets: Western Europe, China, USA and Russia. Meanwhile, PESA and Stadler have already had their fingers burnt selling in the Russian market as the Rouble took a tumble in value and other manufacturers’ interests in joint ventures have cooled slightly.
Looming over all this is the Far East, and particularly the rise of China in the world economy; a booming domestic market for tramways and metro systems now underpins both their development and export efforts. Chinese-built vehicles have crept further west, at present as far as Turkey, but even crossing the Atlantic to reach Boston in terms of a major metro car order. A new light rail system in Africa (Addis Ababa) is also equipped with Chinese trams. A framework agreement signed in May should also see Chinese trams running in Astana, Kazakhstan in time for Expo 2017.
This year and next will therefore see more regrouping as international manufacturers look to improve their balance sheets and stay in business.
A year of transition
Alstom Transport has a strong order book, up 61% on last year, mainly thanks to the railway sector, but with some notable extensions to its established tram market, in Australia and Canada for instance. The French multinational is, however, burdened by losses in its power generation business, but later this year this will be sold (subject to EU approval) to US-based General Electric for EUR12.4bn. Those whose memories stretch back to the 1989-98 operation of the Franco-British GEC-Alsthom (which can still be seen on the kickplates of some Underground trains) may detect a certain irony here.
Anyway the GE deal will enable the Transport division – now with a 20% French state interest – to stand on its own, beating off a rival proposal for a merger with Siemens, which the French Government definitely did not want. The energy businesses are now classed as discontinued operations, and in future the company will be focused on transport and some residual joint ventures in energy. A charge under the US Foreign Corrupt Practices Act has resulted in a EUR720m fine, and EUR100m has been written off from the Russian joint venture with Transmash Holdings due to the decline in value of the Rouble. It is hoped to increase operating margins from the present 5.1% to 7%.
Bombardier Transportation is another success story. The firm’s 2014 rail order book stands at USD12.6bn, compared with USD8.8bn in 2013, and in the tram/LRV sector Bombardier has led the field with orders this decade. But the Canadian holding company Bombardier Inc needs cash to bolster its aerospace activities – with a slowdown in the market for large business jets and well-publicised delays and budget overruns in the development of its latest C Series jet – and Transportation could be affected by the merger of Chinese giants CSR and CNR, which is likely to strengthen the latter’s Research and Development and product development.
On 7 May Bombardier Inc confirmed that it is preparing for an Initial Public Offering of a minority stake in its Transportation business in the last quarter of 2015. This move to create a separate publicly traded company should strengthen the group’s financial position, but preserve flexibility as world trends develop. The IPO listing is likely to be carried out in Germany, where Bombardier Transportation has its headquarters.
So what of the giant Chinese Railway Rolling Stock Corporation (CRRC)? The two existing state-owned rolling stock manufacturers, CSR and CNR announced terms for a merger at the end of 2014. The two companies are each made up of several manufacturing plants that have a large degree of autonomy in terms of developing their own products and also chasing orders, both domestic and overseas. They are listed on the Shanghai and Hong Kong stock exchanges, and their combined revenue in 2012 was HKD200bn (EUR23bn), more than twice that of Bombardier. They have 90% of China’s domestic market, so the merger is intended to improve the ability of the merger organisation to compete in the international marketplace.
After many years of rapid metro expansion while trams were ignored, the tram is now seen as having a significant future for many Chinese cities, reaching the parts the metro does not in a more affordable manner. If the most optimistic predictions come true, there is a market for hundreds of new trams each year over the next decade, and the modern products to satisfy this market have been developed by partnerships with certain familiar names: Alstom, AnsaldoBreda, Bombardier and Škoda. It seems pretty certain that trams for China will be built in China, but building scores more for the western market to take advantage of the economies of scale is a distinct possibility. Is it then any wonder that the western manufacturers are re-organising so they can match the sort of prices that a Chinese manufacturer can charge?
Just across the East China Sea is Japan, a country where the tram has a relatively small role in city transport but the commuter railway in many varied shapes and sizes (including metros) provides good business for several manufacturers, although individual orders are smaller. Western manufacturers never get a look in on this market, and the Japanese have not been particularly aggressive in fighting for orders in the west – though Kinkisharyo has done very well in the US.
Hitachi Rail is now a familiar name in the UK thanks to success in winning the order for the next generation of high-speed trains for the East Coast and Great Western lines as well as EMUs for ScotRail. Looking to firm up its European presence as significant growth prospects in its home territories remain slim, on 24 February it signed an agreement to buy the Napoli-based Italian rolling stock manufacturer AnsaldoBreda from the state-owned Finmeccanica, and also Finmeccanica’s 40% stake in Genova-based signalling and train control company Ansaldo STS.
Hitachi will pay EUR773m for Ansaldo STS, but just EUR36m for AnsaldoBreda,
reflecting the recent poor performance of the company in markets outside Italy, dogged by recurring reliability and durability issues. A further bid for controlling interest of Ansaldo STS is then surely only a matter of time. By integrating both the rolling stock and signalling and telecoms businesses gives Hitachi a much greater manufacturing profile in Europe, as well as a broader offering across the rail market.
Finmeccanica’s net debt will reduce by EUR600m with the deal, leaving it with aerospace, defence, space and security interests. Hitachi has said that it recognised the expertise that would be contributed to its European ambitions by both AnsaldoBreda and Ansaldo STS, but it remains to be seen how it may seek to either rationalise or expand the joint estates, and cope with the likely reaction of Italian trade unions to any consequent rationalisation.
So what will this mean for the transportation mode we follow so closely? At the time of writing there are more questions than answers, but it is clear that the next 12 months will mark something of a watershed in the global rolling stock market.
If the Chinese arrive in western markets in a big way as many predict, it will probably be on the basis of price. Will the other groups be able to match them? Will Hitachi be able to turn AnsaldoBreda into a viable competitor, and will its monorail expertise be further developed for European or North American markets?
What role will regulatory bodies play in preserving European manufacturing? Will some of the smaller manufacturers follow Vossloh in deciding there is not enough money in the vehicle market to be worth continuing their interest?