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World Rail Battle - Who Is To Win?

The global rail market is to reach $205 billion in the next five years. Chinese rail companies are growing more aggressive overseas with the backing of the government, but they still have hurdles to overcome. Last November, state-owned giant China Railway Construction announced that it had won Mexico's first high-speed rail project, shocking industry players who wondered how it had drawn up a plan so quickly. As other global giants dropped out of the race, China Railway worked with other state-owned enterprises, such as CSR, to put together a plan with a speed that defied industry understanding.

But several days later, Mexico abruptly canceled the order. The bidding period was too short, and the decision to cancel was made to ensure transparency and legitimacy, according to the government.

The railway industry is trending away from individual orders for such items as rolling stock and signal systems in favor of comprehensive proposals covering everything from design and construction to rail car production. The big three global companies have expertise in this area, and they and other industry players from Japan and elsewhere are starting to vie for orders for train operation systems.

In this new competition, which requires meeting standards for safety and efficiency, Chinese businesses will need not just to expand, but improve their ability to offer operation systems and make proposals as well.

China's two largest rail car manufacturers are looking to merge into a global giant of unrivaled scale able to offer dramatically lower prices. China CNR and CSR, which already hold the No. 1 and No. 2 global market shares in rail cars, have submitted a merger plan to the State Council, according to Xinhua News Agency.

The plan will be screened and have to obtain the council's approval. The most likely scenario is for CSR to absorb CNR, according to sources close to the matter. The two are expected to announce specific steps by the end of the year. CNR and CSR generated combined sales of 195.1 billion yuan ($31.7 billion) in fiscal 2013, more than 20 times the scale of the railway businesses of Hitachi or Kawasaki Heavy Industries. Together, they will loom far larger than Western rivals Bombardier of Canada, Siemens of Germany and Alstom of France.

Capitalizing on the economies of scale, the merged company is expected to work to win more orders for high-speed trains in Asia and South America. It will likely be in a position to offer prices undercutting Japanese, U.S. and European manufacturers by half or more.

Hitachi has landed a deal to buy the railway business of Italy's Finmeccanica for a sum seen exceeding $2.14 billion. This has marked Hitachi's biggest acquisition ever, eclipsing its 2003 purchase of IBM's hard-disk-drive business for $2 bil.

The Italian defense and aviation company announced last summer plans to unload wholly owned rail car subsidiary AnsaldoBreda and Ansaldo STS, a traffic signal company in which it holds a roughly 40% stake.

Four companies, including Thales of France, stepped forward as prospective buyers. Hitachi came close to sealing the deal last November, but a subsequent offer from a Chinese company delayed Finmeccanica's final decision.

Hitachi plans to first acquire all shares held by Finmeccanica in the two companies and then make a tender offer to turn the Milan Stock Exchange-listed Ansaldo STS into a wholly owned subsidiary as well. With Ansaldo STS' market capitalization roughly equivalent to 240 billion yen, the deal is expected to cost Hitachi more than 250 billion yen.

The acquisition will push up the Japanese company's annual sales from rail-related businesses to more than 400 billion yen -- half as much as Bombardier of Canada, Siemens of Germany, or Alstom of France.

Hitachi's rail operations, which have focused on Japan and the U.K., will now go global and gain Italian rail car production facilities. Ansaldo STS enjoys high profitability and is the second-largest player in traffic signal systems. It boasts solid track records in the U.S. and Europe.

With rail car giants China CNR and CSR on course to merge this year, giving rise to an industry behemoth, more consolidation has followed after the Hitachi-Finmeccanica deal.

Hitachi Rail Europe has won the project to replace the high speed trains of UK railway network, and became the leading candidate for a planned 500km railway linking Mumbai and the state of Gujarat, the first step in India's extensive high-speed rail project.

This year JSC Russian Railways have allocated six billion rubles from the federal budget to finance the Moscow–Nizhny Novgorod–Kazan high-speed rail line. The project implementation will lead to the creation of new jobs and economic development and will also help connect Russia to global transport routes: the high-speed Moscow–Kazan railway will join the high-speed transportation corridor from Moscow to Astana (Kazakhstan) and Beijing (China). The Chinese government is ready to provide $10 bil of investments into the line on special terms. Recently China actively promote their New Silk Way rail plan, which is to turn the port LianYu-gang (between Shandong and Jiangsu provinces) into one of the biggest ports in Asia Pacific Region and boost economic development of inner and Western China.

Nowadays Southeast Asian countries, India and Middle Eastern nations have begun moving to build new commuter railway lines and high-speed interurban railway systems as a trump card for easing traffic congestion and accelerating economic growth.

The export of railway infrastructure, which helps to support people's lives and a country's economic activity, is the kind of challenge that tests Japan's overall strength, which covers not only the competitiveness of individual companies but also the country's capability in diplomacy and finance.

Source: Asia Nikkei Review, RG, European Railway News

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