Can global sales offset China slowdown for state rail maker?
The China Railway Rolling Stock Corp. would be in the frame to sell high-speed trains to the US under Donald Trump’s infrastructure plan
China Railway Rolling Stock Corp. is trying to roll out its next act. Boom times for the state-owned train maker have come to an end now that most of China’s cities are linked by high-speed rail networks. As a consequence, domestic demand for CRRC’s railroad equipment is falling.
News website Caixin recently quoted a source close to CRRC as saying the company sees its train sales plunging by a third in the next decade. China has laid 22,000 km of track since 2000 at a cost of trillions of yuan. Future build-outs will focus on the country’s rural interior where mountainous terrain and fewer passengers means building smaller, lower-speed, less lucrative train systems.
“The year 2015 was a historic high,” an unnamed source told Caixin. “We expect Chinese train sales won’t ever surpass those levels again.
China’s top rail equipment manufacturer was formed in 2014 through a merger of CNR and CSR, two rival state-run railway equipment makers. The company, which bills itself as the world’s largest rolling stock maker, has 177,500 employees and 46 subsidiaries worldwide. Its main products are high-speed trains, diesel locomotives, subway cars and components.
CRRC announced in late March that its profit slipped 4.4% in 2016 to 11.3 billion yuan (US$1.64 billion), with revenue dropping 5% to 229.7 billion yuan. Its flagship railroad equipment unit saw revenue slide 18% to 106.9 billion yuan on lagging orders and deliveries.
Foreign sales crucial
But China’s train-making monopoly is eyeing a one-stroke solution to turn things around — overseas sales. It hopes to sell high-speed trains, and subway and light-rail systems abroad. Selling transport systems in Asia and Europe under the ambitious One Belt, One Road project is expected to be a major source of business.
CRRC’s international sales so far have been a mixed bag. The one bright spot has been selling subway cars to the US and other countries. While several high-speed rail deals have been signed in Europe and Asia, many face delays and are yet to be completed. Most of its successful rail exports consist of slower-speed railway, light rail system and subway car sales to Iran, Thailand, Saudi Arabia, Australia, Turkey, Eastern Europe and various African nations.
On the flip side, CRRC’s edge in selling overseas is aided by the Chinese government’s financing for such rail projects through sovereign and commercial bank loans.
The World Bank also estimates that Chinese rail construction costs are cheaper, weighing in at US$17 million to US$21 million per km vs. US$25 million to US$31 million per km for non-Chinese companies.
Another potential lift to CRRC’s foreign ambitions is President Donald Trump’s plan to spend US$1 trillion to rebuild America’s infrastructure. Trump’s proposal includes a high-speed rail component.
Robert Lawrence Kuhn, a political/economics commentator for China Global Television Network, says that President Xi Jinping may offer Chinese high-speed rail technology and infrastructure financing to the US when he meets with Trump during his US summit starting April 6.
“High-speed rail in particular can be a major area of win-win cooperation,” says Kuhn, who serves as an official adviser to China’s government.
But CRRC faces plenty of stateside competition from Japan’s Kawasaki Heavy Industries, Germany’s Siemens AG and other rail rivals. Shinkansen maker Kawasaki has sold products including subway cars in the US since the 1970s and is a world leader in manufacturing high-speed trains. Japanese Prime Minister Shinzo Abe is also pushing for Japanese firms like Kawasaki to play a role in Trump’s infrastructure plan.
Siemens likewise boasts rail assembly, service, maintenance and repair plants in Sacramento, California, and a rail refurbishment facility in Calgary, Canada. These could be helpful in selling more trains in the US.
It isn’t clear, moreover, that Trump will look favorably on state-owned Chinese companies like CRRC playing a major role in upgrading the US’ ailing rail network.
Several of CRRC’s existing deals to build high-speed train systems in the US, Asia, Mexico and Europe have gone off-track for political, technical and other reasons.
“The Chinese government wants Chinese labor employed if they’re going to help finance high-speed rail systems. I’ve heard this has caused proposed projects to stall. This is not surprising since most local governments want to be perceived as spurring their domestic job markets,” said a US-based infrastructure analyst, speaking on condition of anonymity.
Another obstacle is right of way issues where rail companies face trouble laying track through populated areas.
“The Chinese government wants Chinese labor employed if they’re going to help finance high-speed rail systems. I’ve heard this has caused proposed projects to stall”
XpressWest, a US company that’s building a high-speed rail link between Las Vegas and Los Angeles, scrapped a joint venture with a Chinese rail consortium that included CRRC in June 2016, citing delays faced by its partner.
CRRC is participating in a high-speed railway project in Thailand that will connect China and Laos with Thai coastal ports. But the US$5 billion first phase of the 873-km rail network is mired in red tape and is yet to move forward.
In Indonesia, a China-backed Jakarta-Bandung high-speed rail project has stalled due to land, financing and security issues. The project is also being built by a consortium that includes CRRC.
CRRC got another black eye in November 2014 when Mexico’s government canceled a high-speed rail project with China. The Mexican government blamed falling oil prices undercutting financing for the effort.
While CRRC’s high-speed rail proposals in other nations have been disappointing, however, it has lately gained significant traction selling subway cars in the US.
CRRC inked two big deals in March to supply subway cars to Los Angeles and Philadelphia. And it has already bagged billion-dollar contacts to provide subway cars to Chicago and Boston. A consortium led by Bombadier and CRRC also is reportedly close to winning a major New York City subway car contract.
“We are helping President Donald Trump realize his infrastructure-rebuilding plan,” China Daily recently quoted CRRC Vice-President Yu Weiping as saying about the company’s coups in the US subway market.
Doug Tsuruoka is Editor-at-Large of Asia Times