Train Takeovers

China's Rail Giants on a European Tour

epa04802420 Visitors view models of mass transit trains presented by China's CRRC Corporation, during the Beijing International Urban Rail Transport Technology Exhibition at the China International Exhibition Center in Beijing, China, 16 June 2015. The exhibition center held simultaneous expositions in fields of consumer electronics, product lines in defense and security, and technologies in rail transport. EPA/ROLEX DELA PENA +++(c) dpa - Bildfunk+++
Picture Source: DPA
  • Why it matters

    Why it matters

    Competition from China could hit European train operators at a vulnerable time.

  • Facts

    Facts

    • The China Railway Construction Corporation recently acquired a small German-Swiss specialist train engineering group Cideon.
    • Beijing has declared the railroad sector a key growth industry.
    • By acquiring Cideon, the CRCC will acquire knowledge in how to navigate European train licensing agreements
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  • Audio

    Audio

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The rail industry already has plenty of problems. It has excess capacity, quality is poor and it has lagged behind when it comes to digital technology.

And now, at the worst possible time, the government-backed competition from China is on the attack – earlier and much more aggressively than expected. Barely noticed by the public, the state-owned China Railway Construction Corporation or CRCC has acquired a small German-Swiss specialty company, one that is of great significance for the Chinese. Engineering and software specialist Cideon is well versed in Europe’s complex licensing procedures. And no locomotive is permitted to operate without a license.

The foray from the Far East could arrive more quickly than industry insiders had thought. They had expected it to happen in 10 years. But today Volker Schenk, president of the German Railway Industry Association, the VDB, is convinced that the “Chinese manufacturers will begin to increasingly push their way into the European market in one or two years,” as both a seller of products and buyer of companies.

Only recently, they paid a visit to Switzerland, where they met with Peter Spuhler, president and owner of Stadler Rail, one of the leading manufacturers of railroad vehicles in Europe, next to Alstom, Bombardier and Siemens. Stadler employs 7,000 people and reported sales of €2.2 billion ($2.498 billion).

By contrast, managers with the China Railway Rolling Stock Corporation or CRRC, are already responsible for sales of €32 billion. CRRC easily has the capacity to serve half of the world market. “They came knocking at our door,” said Mr. Spuhler. “There are only about 10 companies left in railway vehicle production in Europe. If the Chinese want to crack European markets, they need a basis here that will enable them to manage the national approval processes.”

Despite Beijing' massive railroad investments – with estimated spending of €540 million between 2016 and 2020 – Chinese companies are no longer operating at capacity

CRCC, at any rate, now has that base. The industry is still wondering why an infrastructure group like CRRC, which does not actually build locomotives, is interested in Cideon. The answer is that the deal gives them a foothold inside an industry they want to know more about.  “China’s providers are everywhere now. They look at all invitations for bids and all railroad companies that are for sale,” said Maria Leenen, head of consulting firm SCI Verkehr. “And they will succeed soon and strike.”

China’s railroad giants are forcefully pushing into the West – because they have to. Despite Beijing’ massive railroad investments – with estimated spending of €540 million between 2016 and 2020 – Chinese companies are no longer operating at capacity. This is a consequence of declining economic growth and the shift in traffic to roads. According to industry insiders, CRRC effectively shut down an entire plant capable of producing 40,000 freight cars a year.

The Chinese rail industry essentially consists of three companies: CRRC, CRCC and a manufacturer of signal technology. Beijing has declared the sector a key industry, which is why growth is the supreme objective. But that is only possible abroad for now. According to CRRC, its exports in 2016 increased by 67 percent, to €3.6 billion. The company’s goal is apparently €12 billion, say industry insiders. Not even Bombardier, the market leader in the Western world, can boast sales of that magnitude. “Beijing is applying enormous pressure,” said an expert.

The Chinese are already relatively successful in the United States. In €570 million deal with Chicago, they will supply the major U.S. city with 400 subway cars, with an option for another 440 cars. China’s steps in Europe are still modest by comparison. CRRC is building six high-speed trains for Macedonia, Serbia ordered a few locomotives and Estonia a few diesel locomotives.

The Train Industry-01

Mr. Schenk, whose main job is as a member of the board of directors of transport technology maker Vossloh, is mainly concerned that the new competitors could engage in unfair predatory competition. Financing is a case in point. Chinese manufacturers often offer 15 years interest free financing followed by 30 to 50 year loans at incredibly low interest rates of around 1 to 2 percent. No Europeans can compete with that.

“We needn’t fear the Chinese when it comes to technology,” said Mr. Schenk. But he does call for “fair underlying conditions.” “As a state-owned company, CRRC has access to inexhaustible financial means.” This has prompted the VDB president to urge the German government to give the industry more support.

 

Dieter Fockenbrock is Handelsblatt’s chief correspondent for the companies and markets desk, focusing on corporate governance, opinion and rail transport. To contact the author: fockenbrock@handelsblatt.com.

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