Era of change The Big Three under pressure

ERA OF CHANGE

The European rail industry is still dominated by Alstom, Bombardier and Siemens but the Asian competition is moving in. James Abbott, editor of Modern Railways magazine, reports.

What is to become of Alstom, one of the European ‘Big Three’ of railway manufacturing? Speculation was rife in the spring of 2014 after General Electric of the USA made an offer to buy Alstom’s power turbines and grid business for €12.35 billion. The cash-strapped firm welcomed the offer, which did not include Alstom’s Transport division, but the French government was not so keen on having such a major part of the French industrial establishment passing into American hands.

The Hollande government was instead pressing for a European solution, in which arch-rival Siemens of Germany would take Alstom’s power business in a swap with some or all of Siemens’ rail assets – which would leave Alstom as a rail-focused company. Siemens initially expressed little enthusiasm for the idea. The early talk was of a deal in which Alstom would take Siemens’ high-speed train expertise and merge it with the French company’s famous Train à Grande Vitesse production. Suburban train and loco production would move too, but light rail and metro work would have stayed with Siemens under this scenario.

As the month of May 2014 wore on the German company seemed to be warming to the idea of a deal with Alstom, and talk was of not only a part, but all Siemens’ rolling stock production assets transferring to Alstom, with a joint venture being set up for signalling equipment. Under this scenario the French government would, through a holding company, increase its stake in Alstom from under 1 per cent to around 10 per cent, giving it more say in future over the direction of the group.

As Industry Europe closed for press the full details of any Siemens counter-offer to the GE bid (if indeed the German company eventually chose to make a formal bid) remained to be seen. But if the so-called European solution to the Alstom question is realised, it will radically alter the landscape of railway equipment manufacturing in the continent.

For many years, Canadian firm Bombardier, whose railway equipment arm is headquartered in Berlin, has been the largest of the European ‘Big Three’. If three become two, the new Alstom will be larger than Bombardier.

Alstom already owns an important manufacturing facility in Germany: the former LHB works at Salzgitter producing suburban trains. Adding the large Siemens plant at Krefeld to this would make the French company a major player on the German scene.

Asian influence

In the 1990s Europe was top dog in the railway equipment manufacturing world, but in recent years the picture has changed. Urbanisation in Asia has made that continent the biggest market in the world for railway equipment, and now Chinese and Indian manufacturers are large players (Japan has long had a large railway equipment sector). But the Asian firms are still largely building for domestic consumption and the European Big Three remain important players for railway equipment that is traded across borders.

Joint ventures in China cement a presence for the Europeans and Japanese in the biggest market in the world by volume.

The Asian and European railway equipment worlds are becoming further enmeshed. Japanese company Hitachi is building the first Asian-owned assembly plant in Europe, at Newton Aycliffe in County Durham in northeast England. This is being set up on the back of an order to manufacture 863 vehicles for inter-city trains for the Great Western and East Coast main lines in the UK.

The Great Western and East Coast trains will keep Newton Aycliffe busy up until the end of the decade and the interesting question will be what happens then. Hitachi will no doubt be hoping that it can emulate the success of the nearby Sunderland car plant of fellow Japanese company Nissan, the most productive auto facility in Europe and a major exporter to the Continental mainland. Less positive is the example of the railway wagon manufacturing plant in York set up by the American company Thrall Car in the 1990s to address a requirement for freight vehicles in the UK, but which failed to gain further orders and closed once the specific requirement was met.

The search is now on for additional work to supplement Newton Aycliffe’s initial order, but Hitachi recently missed out on 585 vehicles for trains for the new Crossrail suburban

line in London – that contract went instead to the sole remaining historic rolling stock manufacturing plant in the UK, Bombardier’s Derby factory. Hitachi also lost out on a bid to build suburban trains for Hamburg.

Further Asian influence can be seen in a recent order for vehicles for the Stockholm metro, which went to Bombardier. Nothing unusual there – Bombardier is a long-time supplier to the Swedish capital. But the bodyshells for these cars will be coming from Bombardier’s joint venture company in China, which could presage further interlinking of the European and Asian industries.

Second tier players

Elsewhere on the European railway equipment manufacturing scene, there is speculation as to what will become of Italian supplier Ansaldo. The company has had a disastrous recent history in rolling stock manufacture, capped by rejection on quality grounds of a fleet of high-speed trains built in Italy for the high-speed line linking Brussels to Amsterdam. The cancellation of the order was the culmination of a long-running saga that soured relationships between the Italian and Dutch governments and left the Italian company seriously out of pocket.

In contrast to the ailing rolling stock side, Ansaldo’s signalling equipment arm is a vigorous player in that market and has been linked to Hitachi in recent reports. But it seems unlikely that the Japanese company would take the signalling unit if a condition of any sale was that it took on the rolling stock unit as well.

Contrasting with the Italian company is Spanish firm CAF, which persists as a successful independent business in a market increasingly dominated by global players. From its factories at Zaragoza and Beasain in northern Spain, CAF exports 80 per cent of its output to markets ranging from New Zealand to South America and most of the northern hemisphere as well.

A large chunk of CAF’s equity is owned by local building societies and the firm retains an independent streak in its approach to manufacturing. While the European Big Three increasingly run assembly plants, where components from toilets to couplings are produced by sub-contractors and assembled at the main contractor’s site, CAF still has integrated manufacturing facilities. At the Beasain plant in the Basque hills you can still see molten metal being forged into railway wheels in the same factory that puts the trains together.

Diesel quandary

There is change afoot in the European diesel locomotive market. With most of the continent’s main lines being electrified, electric locomotives supplied by the Big Three dominate the loco market. But diesel remains important in the freight sector, as many byways used by freight trains are not electrified. The likes of Siemens and Bombardier are catering for this by bringing out ‘last km’ models, where electric locos are fitted with small diesel engines to get them over those last few unelectrified kilometres to freight sidings.

There remains some requirement for straight diesel locos. The market is tiny compared to North America, where General Electric and Caterpillar-owned EMD turn out diesel locos by the hundred for hauling freights three or four thousand kilometres across the Great Plains. In Europe, the industrial areas are more closely grouped together, which means rail does not have the same natural advantage for freight that it does in North America.

The US giants have produced locomotives for Europe, but it has not been an altogether happy experience. EMD did well in the UK in the 1990s and tried to emulate that success on the Continental mainland, but red tape in the approval process has left the American firm increasingly exasperated. GE followed with a model for the UK but has failed to gain volume sales in Europe. There has been some talk of the GE loco plant in Erie, Pennsylvania, going to Alstom as part of a deal over the two companies’ power generating capacity, but failing that coming to pass the two continents’ loco manufacturing industries look set to diverge as the Americans find Europe unrewarding by comparison with their home market.

That leaves a small European diesel loco industry, with the Big Three having a residual capacity for diesel locos. In addition, the German firm Vossloh has plants in Kiel in Germany and Valencia in Spain turning out locos powered by Caterpillar engines, but another German railway equipment supplier, Voith, has given up the game and closed its loco plant in Kiel in order to concentrate on rail vehicle components and overhaul. There are independent suppliers in Poland and the Czech Republic supplying eastern European markets.

A complicating factor in the diesel loco market is that the European Commission is enforcing harsh emissions standards known as the IIIb directive. Worst affected by this is the UK, as that country has a tight loading gauge (the clearance between train and lineside structures) which requires small bodyshells, making it difficult and expensive to fit exhaust cleaning kit in a loco. Under special dispensation from the Commission, EMD and Vossloh are currently building a last handful of new diesel locos for the UK that meet the previous IIIa emissions

standard, but after that the economics of new locos alter radically. The perverse effect of the Commission’s activity could be to push freight to road haulage, which is generally held to be more environmentally damaging than rail.

Operations

On the operating side of the railways, the most interesting countries are Sweden and the UK, as these are the EU member states that have done most to liberalise their markets. Elsewhere, state-owned railways continue to dominate.

The UK lets all its passenger operations out on franchises of seven years or more. While private sector companies such as First Group and Stagecoach participate, subsidiaries of the German, French and Dutch state-owned railways are also important players – which is not quite the sort of competition envisaged by the architects of the British railway privatisation 20 years ago.

The French state railway SNCF is a 20 per cent shareholder in NTV, a company that competes in the high speed rail sector in Italy. Meanwhile the German state railway DB has tentacles spreading over most of the continent following an aggressive acquisition programme that some allege was indirectly subsidised by the German government through its generous infrastructure grants in Germany, leaving DB with spare money to invest elsewhere.

It began with expansion in rail freight and DB’s cargo arm is now the biggest player in rail freight in the Netherlands and the UK as well as Germany – and has important operations in several other countries.

On the passenger side, major expansion outside Germany came with the acquisition of Arriva, which was the most active of the privatised British transport companies in the Continental rail market. The European Commission insisted DB divest itself of Arriva’s operations in Germany, where DB is already the dominant player in competitions for local train operating concessions, but in other countries it continues to trade under the Arriva name.

In a joint venture with MTR, the company that runs the Hong Kong mass transit system, DB has the concession to run the London Overground network in the British capital. Through Arriva, DB runs suburban train operations in Stockholm and elsewhere.

While the Germans are running the suburban trains in the Swedish capital, MTR has the concession to run the Stockholm metro. The Chinese company is looking to expand further in Europe and is now eyeing the inter-city market in Sweden. Sweden has recently abolished the monopoly of state operator SJ in the longdistance sector and MTR is buying new trains from Swiss company Stadler with the intention of competing with SJ on the lucrative Stockholm to Gothenburg route. MTR’s services are expected to start running in the autumn. n