An elusive market - From the Editor - China - Industry Overview

Railway Age, April, 2003 by William C. Vantuono

The world's largest market for transportation equipment and services is China, where Chinese Railways is being reorganized along more market-oriented lines and is opening itself to advanced technology from outside as it tries to satisfy "a voracious national appetite for rail capacity," says International Railway Journal Senior Editorial Consultant Mike Knutton, who prepared this month's special report (p. 26). Under CR's 2001-2005 capital plan, $32.6 billion is being invested in infrastructure; $9.7 billion in motive poxver and rolling stock. Roughly the same will be invested in China's next five-year plan.

Does this mean there's lots of opportunity for U.S. suppliers? Well, maybe. "The paradox for foreign manufacturers seeking to enter this booming market is that the proportion of imports is shrinking," says Knutton. However, "despite a drive for indigenous production, significant opportunities exist for foreign rail industry suppliers willing to be patient and to invest time, energy, and resources."

I spoke with two people who have extensive experience in China. Consultant Bob McIntire heads the Railway Supply Institute's Committee on International Trade. "The Chinese railroads cannot meet customer demands due to the robust economy and are short over 140,000 freight cars daily," he says. "This has prompted reform and higher capital spending." McIntire characterizes the Chinese view of the U.S. rail industry as one of high regard. "They are particularly interested in forming joint ventures and technology transfers, such as the highly successful joint venture with Meridian Rail, which has been supplying wheels and Swing Motion trucks." He describes China's rail industry as "a complex system."

A word of cautious optimism comes from Wabtec International Vice President Tim Logan, who describes China as "an emerging, slowly-changing market that until recently has been elusive due to low prices from domestic suppliers." Freight car and locomotive annual building rates are expected to be in the 15,000-20,000 and 300-500 unit ranges, respectively.

For U.S. suppliers, China's current pricing structure "is a barrier to entry," says Logan. Why? "The Ministry of Railways is still essentially a government operation that has yet to rationalize the industry." The MOR oversees two governing bodies, North LORIC and South LORIC, which assign value to various freight car components, prompting domestic suppliers to often sell at a loss. "It's tough to compete with that," says Logan.

Wabtec's approach to China, says Logan, has been to establish a strong local presence and invest within the market. "We cannot export," he says. Protecting intellectual property "is a challenge." But the market could change. Near-term, he says, technologies the MOR feels have "significant benefit" will be considered from non-domestic suppliers.

If you're a transit supplier, says Logan, doing business in China isn't all that different from dealing with North American transit agencies. Chinese transit systems are autonomously operated by local authorities who engage in "traditional OEM/supplier relationships." The market looks like it will support 1,500-2,000 electric multiple-units and locomotive-hauled coaches annually over the next few years. Japanese and European suppliers (like NABCO, Wabtec's Japanese affiliate) have had considerable success in China.