North American Rail Supply and China: Why We Should Be ConcernedWritten by Robert H. Cantwell, Contributing Editor
Caveat: I am a free-market capitalist who believes in the importance of trade to elevate global prosperity. I believe in comparative advantage, and how countries excel at the supply of certain goods and services, to the benefit of others. I now believe that there needs to be market boundaries, for the long-term health of entire industries and the well-being and security of our citizens.
I have been travelling to China throughout my entire 40-plus year career, and have seen first-hand China’s evolution in the rail supply industry. Its ambitions are to dominate the global rail rolling stock supply chain: passenger/transit, and now freight.
China, specifically CRRC (China Rail Rolling Stock Corp.), is a clear and present danger to the health of the North American rail and rail supply industry, and the thousands of people who rely on it for their livelihoods and high standard of living. That is a very bold statement, but here is why I now believe it to be true:
China covets our standard of living, and to elevate 1.4 billion people to our level requires big plans with ambitious goals. The country views our markets as wide open and available for their growth.
CRRC is a huge, $30 billion SOE (state-owned enterprise) with 163,000 employees, focused on the design and manufacture of passenger/transit and freight rail components and rolling stock. It has directed its focus to global growth in support of China’s doctrine to project China’s influence and to keep its people employed.
To illustrate CRRC’s strategy, I’ll look at several case studies along with insight excerpted directly from its annual reports, plus other publications:
- China High Speed Rail.
- Australian freight railcar builders.
- North American transit industry.
- North American freight railcar components and railcar building.
First, some background: China has developed several critical strategies to accelerate its global growth and project influence. Two that hit very close to home are “Made in China 2025” and “One Belt/One Road.”
“One Belt/One Road” is China’s “New Silk Road,” a strategy that has identified critical trading partners and the need to construct robust infrastructure (ports and supporting rail systems) to facilitate trade for centuries to come. It’s being used to employ hundreds of thousands of Chinese at home and abroad, but more important, to project Chinese influence. Look no further than the many global rail infrastructure projects China has undertaken throughout the European and Asian continents. Most involve new ports with new rail systems, including new rail equipment. CRRC plays a critical role in “One Belt/One Road”.
“Made in China 2025” lays out 10 key industries that China intends to dominate: railway technology (and railway supply) is one of the 10. “Made In China 2025” and the global spread of Chinese rail technology is intended to project Chinese influence.
If you doubt my observations, here are a few excerpts from CRRC’s 2019 Annual Report:
Message from the Chairman: “The year 2019 marked the 70th anniversary of the founding of the PRC, and was therefore particularly significant to CRRC. The Group has been standing at the forefront of the times, as a sturdy pillar of a developing China, and has realized major leaps, from local enterprise to multinational corporation, from unknown to well known, from market follower to trend leader. CRRC’s history is a microcosm of China’s great achievements and a model for central enterprises … CRRC is the world’s leading rolling stock supplier with a large-scale, diverse product portfolio, and first-class technologies ranking among the Global 500 companies and China Top 100 companies, with products exported to 105 countries and regions … CRRC is a prestigious business card of China; it has attracted world-wide attention.”
On CRRC’s 2019 International accomplishments: “The Company (CRRC) implemented its international strategy vigorously by seizing the development opportunities arising from the ‘Belt and Road Initiative’ and ‘going global’ strategies. The Company actively expanded overseas markets and promoted the transformation of export products from mid- and low-end to mid- and high end. The Company had 17 overseas research and development centers in total, further contributing to the integration of research and development resources and the enhancement of market development ability … During the reporting period, the Company generated revenue in about 76 countries or regions. The main products are urban rail transit vehicles, freight wagons, and high-end parts and components, etc.”
On CRRC’s future direction: “The Company will strengthen plans from the top, formulate the special development plan and implementation scheme for the market development of the countries along the ‘Belt and Road Initiative,’ take an active part in the construction of the ‘Belt and Road Initiative,’ and create a new pattern for opening up and development of ‘going global.’ According to the idea that the complete equipment drives components, manufacturing industry drives service industry, general contracting drives the industry [supply] chain and rail transit equipment drives non-rail transit equipment, the Company will expand overseas markets; strengthen the plans from the top of offshore presence; increase the resource investment and integration on international businesses; set up international business platform companies; build a global, centralized, coordinated marketing and regional management system; strengthen brand development and promotion; strive to play a role in industry organization and standard system; enhance industry influence and voice; and enhance international competitiveness. The Company will carry out Greenfield investment, strategic mergers and acquisitions, joint venture operations; promote a total factor business mode of “product + technology + service + capital + management”; promote the five-local model; and speed up the transformation from domestic to international market, from ‘going global’ to ‘going inside’ and from domestic enterprise to a multinational company.”
These are CRRC’s words, not mine. There is little doubt as to CRRC’s global ambitions.
China’s $500 billion high-speed rail buildout is nothing short of miraculous, based on what it has achieved during a short span of 10 years. But it was built initially with Western technology from Siemens, Alstom, Bombardier and Kawasaki and subsequently “improved” by China. Those Western companies had high expectations for the growth of HSR in China, only to see it shift rapidly into the hands of Chinese SOEs. Today, China is competing head-on with those Western companies who taught it in the first place. It has also been identified that only 5 of China’s 15 HSR lines cover their operating costs. There are many lessons to be learned here.
Examples of the impact of CRRC’s global strategy are right here in our backyard and abroad:
Australia: During a 10-year span, three Australian freight railcar builders were vaporized by China and CRRC. Although a relatively small market, Australia now relies on China for 100% of its freight rail rolling stock, and now regrets that reliance. Bradken, the last holdout, went so far as to establish a factory in China in hopes of exporting railcars to Australia and selling railcars into the Chinese market—something that was never allowed. So much for free and fair reciprocal trade.
North American Transit: CRRC set out ambitious plans to dominate the North America transit railcar market in short order, commencing with the award of MBTA (Boston) metro cars in 2014. During a two-year span, it won—through Chinese-government-backed bids that, like MBTA’s, were as much as 30% lower than those of competitors—additional orders from the CTA (Chicago), SEPTA (Philadelphia) and LACMTA (Los Angeles). CRRC was on its way to reaching its goal of capturing virtually 100% of the transit rail market. The company did build railcar assembly plants in Chicago, Boston and Los Angeles to support its new-found wins, but its production strategy differed significantly from incumbent transit car builders who were vertically integrated and employed thousands of U.S. workers. CRRC, on the other hand, imports the carbody shells and other major components from China, and performs only final assembly in its North American factories, thereby employing mostly Chinese labor and only a couple hundred in North America—all the while conforming, albeit just barely, to “Buy America” requirements.
Fortunately, legislators and municipalities woke up to CRRC’s strategy. There was a groundswell of support in Washington and New York City that led to WMATA and MTA New York City Transit to select Hitachi and Kawasaki, respectively, as their preferred transit railcar suppliers, despite CRRC’s strong efforts to capture that business. Most recently, Alstom was awarded a METRA (Chicago) contract, despite CRRC having an assembly facility in Chicago. There is little doubt that without this greater awareness, CRRC would now dominate the North American transit railcar market.
North American Freight Rail Market: The Chinese strategy for the freight rail market is apparent, and likely imminent: Using the same strategy as it did for HSR, learn how to manufacture components and grab component market share by initially “licensing” IP (intellectual property) and then illegally duplicate it*, then evolve to complete railcars. From there, it is envisioned that CRRC would naturally evolve toward building its own lease fleet, offering brand new railcars at extremely low lease rates, all backed by the Chinese government to employ thousands of workers back home. China would likely use its transit car manufacturing strategy: Import carbodies and truck components from China, then assemble them at various locations throughout North America. CRRC has already tried once, with Vertex Railcar. That venture failed, but China and CRRC are persistent, and will be back.
A good friend reminded me recently that leasing companies have a fiduciary responsibility to their shareholders to obtain the best value on their rolling stock purchases. If China offers “AAR approved” railcars at significant discounts from today’s market prices, North American customers may be obliged to buy them. What happens when China enters the leasing business? Are railroads and shippers (which lease or own about 60% of the U.S. freight car fleet) obliged to lease from Chinese lessors in the name “shareholder value”?
Speaking of fiduciary responsibility and anti-trust, the AAR maintains a similar position relative to the approval of global supply companies. AAR is unable to “pick and choose” whom they approve. As a result of this, globalization has severely impacted the North American component supply chain, and many have gone out of business. Currently, there are 76 AAR-approved suppliers of freight railcar truck and coupler components, including side frames, bolsters, couplers, wheels and axles. Of these 76, 29 are based in China and 12 are based in North America. The others are scattered elsewhere around the world. Ironically, it is estimated that each company spends approximately $30,000 annually to maintain AAR certification. As well, AAR certification is the gold standard in China to demonstrate quality control, and Chinese companies are incented to achieve AAR certification.
North American railroads, suppliers, rail shippers and lessors are at an inflection point and face a crucial, strategic decision: Are they OK with relying on an autocratic state employing SOEs that leverages railway technology developed in North America to project global influence and ultimately dominate the global rail rolling stock supply chain? Such ambitions are painfully clear. We’ve seen it in Australia. We almost saw it in North American transit. We’re seeing it through “One Belt/One Road.” North American freight rail rolling stock is clearly CRRC’s next target. The future is in our hands. Let’s not be seduced by low prices and play directly into China’s grand strategy.
Independent consultant Robert H. Cantwell spent more than 40 years in executive positions in the rail supply industry. He has been active in the Rail Transportation Division of the ASME (American Society of Mechanical Engineers) and is past Chairman of the Division. He has also actively advocated with members of Congress in support of the rail and rail supply industry. Bob holds degrees in Mechanical Engineering from the Georgia Institute of Technology and an MBA from the University of Chicago. He possesses a unique perspective on the rail supply industry, combining his engineering experience along with robust economic and financial acumen. As an active investor in the rail industry, he has a vested interest in the success of the industry. The views expressed here are his own.
* Editor’s Note: The Chinese attitude toward intellectual property “has long been the bane of Western manufacturers,” writes Austin Williams, Associate Professor of Architecture at Xi’an Jiaotong-Liverpool University in Suzhou, China, and director of the Future Cities Project in London in “The Origins of China’s Copycat Culture” (Global, the International Briefing). “But it is not born out of disrespect. Rather it comes from a long tradition of valuing rote learning over original thought … This is reinforced by the traditional master-student relationship within schools and universities where, all too often, copying is the default position. University students will regularly copy essays from the internet and present them, uncited, in all innocence. In their view, there is nothing wrong with plagiarising the ‘correct answer’ from a respected expert, instead of spending time trying to give their interpretation of the answer that could be wrong. Seen through Chinese eyes, copying is not only sensible, but it is a symbol of respect for authority and, importantly, it is a way of passing the test … Students, for example, learn an impressive set of artistic skills, but after years of study, each student has merely learned to draw the same object for days and weeks until they ‘succeed’ in the acceptable portrayal of the object. They have been taught to draw particular objects – and only these objects – in a ‘correct’ way. For them, the aim is to ‘get it right’ rather than ‘have a go’. As a result, the system is designed to reinforce a process of engaging people to hone visual memory and regurgitation: It is but a short step to architects copying alluring Western projects.” — William C. Vantuono