In search of lost times Europe’s struggle to

Tendering of local services in Germany has prompted heavy investment in new rolling stock. This is Bombardier’s Talent multiple-unit. In late April, Italian open access operator NTV began operating high-speed services between Naples, Rome, Florence and Milan using a new fleet of Alstom-built high speed trains.

GOING EAST

Europe struggles to maintain dominance in railway equipment manufacturing. James Abbott reports.

2010 was a watershed year for the railway equipment manufacturing industry. The axis of production has shifted from west to east, with China assuming predominance for the first time. This is no huge surprise: it has, after all, happened in many other industries – the interesting point is that the shift has taken so long to arrive in railway equipment.

Railway equipment manufacture is one of those sectors cherished by the European Commission as it is one of the few in which Europe has retained predominance over the rest of the world. Thus it was something of a shock when this year’s annual survey of the industry by the German consultancy SCI Verkehr revealed that Chinese state-owned manufacturer CSR Corporation had overtaken Bombardier to become the world’s largest rolling stock firm by turnover during 2010. Bombardier, with its corporate headquarters in Montreal but with its railway equipment HQ in Berlin and most of its capacity in this sector in Europe, had long been at the top of the tree.

Not only was CSR in the number one slot, but fellow Chinese firm CNR was in the number three position, pushing the other traditional members of the top troika, Alstom of France and Siemens of Germany, into the fourth and fifth positions respectively. Sixth came Transmashholding of Russia, with CAF of Spain, Hyundai Rotem of Korea, Kawasaki of Japan and GE Transportation of the US with roughly similar revenues behind the top six.

China’s pre-eminence is based on the country’s massive home market, with investment monies being poured into a fast-expanding high-speed network and rapidly-multiplying city metro networks. The Chinese rolling stock market is booming on the back of that infrastructure spend.

While the domestic market has roared away, thus far Chinese penetration of the export market in the railway equipment sector has been limited – at least compared to the predominance we have seen in some other industries. CSR and CNR have made sales to neighbouring countries in southeast Asia, and in a symbiotic relationship the Chinese have supplied wagons for hauling ores to the Australian mineral companies that keep the Chinese industrial engine supplied with raw materials. But the Chinese tentacles are spreading, with for example the first Chinese-built train to enter service on the South American continent making a debut in March when the first of 34 electric multiple-units being built by CNR Changchun for the suburban operator Supervia began operations in Rio de Janeiro.

As for Europe, Chinese success thus far has mainly been limited to peripheral countries such as Belarus and the country seems to have reined back on ambitions to penetrate the western European core, scaling back marketing efforts of late. Here, the concerns of the traditional manufacturers are more focused on another Asian competitor: Japan.

One way door

While there is a measure of openness to the Chinese market, with the big western firms having joint venture agreements with domestic Chinese manufacturers, the European firms argue that there is no openness in Japan,

which is to all intents and purposes a closed market to outside suppliers. This is what irks the European industry when Japanese firms come knocking on their local customers’ doors, with some degree of success.

The first high-profile penetration of the European market was Hitachi’s contract for Class 395s on the UK’s High Speed 1 route. These electric multiple-units will be taking centre stage this summer, when they will be operating the high-speed shuttle from St Pancras in central London to the Olympic Games site in Stratford in east London, a role for which they are being tagged ‘Javelins’.

Now, much to the chagrin of Bombardier and Siemens, who clubbed together to put in a competing offer, Hitachi is preferred bidder for a contract for Inter-city Express Programme (IEP) trains for the UK. But this contract has not been without its problems: not only has the credit crunch of recent years complicated financing of the deal, it has also shrunk as the list of duties earmarked for IEPs has been edited. The prime role of the IEP fleet will be to replace 1970s-era diesel High-Speed Trains on the line between London Paddington and Bristol that is being electrified, but some semi-suburban routes for which IEPs were intended are now likely to see existing trains refurbished instead.

We have seen the number of vehicles in the putative order sink below the 685 that is said to justify a European assembly plant, which provisionally would be located at Newton Aycliffe in the north-east of England. The UK Government is considering underwriting extra vehicles to get the factory investment off the ground.

The UK has long been considered the most open of the European Union countries and is the traditional first port of call for outside manufacturers seeking to expand their export base. But Hitachi has further aggravated the European manufacturers by discussing an order for new trains for the Hamburg S-Bahn with Deutsche Bahn (German Railways). The firm told local media that if it won the contract it would build an assembly plant in the area, but it is very unlikely that Hitachi would need two European plants.

In the face of the Japanese incursion the EU Commission is now proposing new regulations that would allow contracting authorities in EU countries to exclude non-EU bids for contracts above €5 million where those contracts are not covered by existing international agreements. The proposal is designed to ensure a degree of reciprocity in market opening.

Not so cosy

The way the domestic European manufacturers have traditionally been protected in their home markets has been by tightlydrawn specifications that can most easily be met by domestic suppliers. But some of the cosy relationships have been upset of late as operators have sought to take advantage of the Commission’s EU-wide tendering rules to vary their choice of supplier.

Last year Alstom was angry when Eurostar, in which SNCF (French Railways) is the majority shareholder, placed an order with German rival Siemens for new Velaro highspeed trains – to the extent of questioning the Eurostar decision in the British courts.

The French manufacturer only agreed to drop its action in the High Court in London when it was mollified by SNCF taking up an option for more double-deck trains for the French high-speed network.

Meanwhile, Franco-German rivalry persists in the railway operating field as well as in manufacturing, as DB and SNCF and their offshoots seek to take advantage of EU open access rules to expand their presence in other countries. DB, in particular, has used infrastructure subsidies from the German state to hoard cash to spend on foreign acquisitions. This policy has attracted some criticism at home as German voters have been displeased by technical problems on the Berlin S-Bahn and elsewhere and many argue that DB should be concentrating on its domestic operations.

Nevertheless, the policy has seen DB expand to become the major rail freight operator in Europe. DB’s purchase of Arriva, the one child of UK rail privatisation to make a major effort to expand on the European Continent, has enabled the German state operator to increase its presence in the passenger market in other countries as well. The EU competition authorities insisted that DB divest itself of Arriva’s German operations when it bought the company, but these have gone to an offshoot of the Italian state operator.

Meanwhile, NTV, a new inter-city operator in Italy taking advantage of EU open access rules, has begun a bold venture with new Alstom-built trains operating over high-speed lines in competition with the state-owned FS. While some Italian private sector money is involved, SNCF is a major shareholder in NTV. And Keolis, a French company in which SNCF is the main shareholder, is one of the main contenders for concessions and franchises for local railway networks across Europe. So it can be seen that most of the competitive activity in the railway operating field on the European continent is between rival state-owned groups rather than private sector companies.

But not all. One new contender in the difficult German inter-city market, where DB’s overpowering muscle makes open access operations a daunting prospect for new entrants, is Hamburg-Köln Express (HKX), which seeks to establish regular services between Hamburg and Cologne. HKX is majority owned by Pittsburgh-based Railroad Development Corporation, in which the charismatic Henry Posner III, a veteran of railway privatisation battles across the globe from Guatemala to Estonia, is the driving force. He is being assisted by Michael Schabas, a Canadian who helped establish transport links to the new financial centre in London’s Docklands in the 1990s and then went on to make money in the UK rail privatisation, along with German investors. HKX hopes to start services this summer.

Eurostar has selected the Siemens Velaro for its next generation of high-speed trains. A mock-up of the new train was erected close to the Albert Memorial in London.

Optimism

Of course, the backdrop to all this is the wider European economy and the railway operators, like other companies, are holding their breath on what will happen to the eurozone. Rail freight in Germany, the engine of the European economy, has bounced back after being savaged in the post-2008 recession, but whether this will hold up with so many of the country’s export markets in difficulty remains to be seen.

But experience with the post-privatisation passenger operators in the UK does give some cause for hope. Rail travel in the UK has boomed, with passenger numbers climbing to approach levels not seen since the 1920s. The statistics were scarcely dented by the post-2008 recession, raising hopes that the age-old linkage between Gross Domestic Product and rail transport demand might finally be weakening. Certainly, the high prices of petrol and motor insurance have helped and in many countries rail is facing an optimistic outlook.

The derived demand for railway equipment is rosy as a result, with Roland Berger Strategy Consultants estimating growth of between 1.5 per cent and 2.0 per cent over the next decade. n

The author is Editor of Modern Railways magazine and Technical Editor of European Railway Review

Artist’s impression of Hitachi-built IEP for the Great Western route in the UK. European expertise in signalling and control systems is widely respected around the world. Invensys, rumoured as a possible bid target for acquisition by the Chinese, installed this control centre on the Oslo metro.