A sleeping giant awakens; 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 - Company Profile - Industry Overview

Railway Age, April, 2003 by Mike Knutton

Bridging the technology gap

China is the world's largest market for transport equipment and services. And, 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. The Chinese market for railway equipment is massive and growing--$32.6 billion is being invested in infrastructure and $9.7 billion in motive power and rolling stock in the 2001-2005 five-year plan, with more of the same to come in the next plan. The paradox for foreign manufacturers seeking to enter this booming market is that the proportion of imports is shrinking.

The vast majority of rail equipment is manufactured inside China, partly because of the country's push to develop its own manufacturing base, and partly because of a 70% local content requirement for all new railway developments. But China still suffers from a technology gap with the developed world, and it is this gap that provides the opportunities for foreign suppliers.

Direct imports are currently restricted to a relatively small number of high-tech components for automatic train control and signaling and telecommunications systems. Opportunities to get a foothold in the market therefore depend on getting some sort of physical foothold in China.

China's preferred method is the joint venture (p. 20), as that can easily be tailored to include technology transfer and training of Chinese staff. Lesser opportunities exist for BOT (build-operate-transfer) projects and even wholly-owned foreign companies.

China's open-door policy has brought full membership in the World Trade Organization. This, however, has not eliminated some traditional trade and investment barriers or some quirky ways of doing business. As one expert comments: "Creativity and flexibility are essential when doing business in China. There is no guarantee that contracts will be awarded in accordance with the checks and balances found in the competitive tendering process normally seen in the West."

There is very little difference between public and private companies in the Chinese rail sector. Many major manufacturers have already been split from the Ministry of Railways, but Chinese government agencies are involved in one way or another in the operations of virtually all domestic manufacturers and suppliers. None of this, however, has prevented global companies from entering into joint-venture agreements. More than 20 U.S. companies from the U.S. are now active in China.

In recent structural changes within CR, five big corporations-rolling stock, signaling and telecommunications, engineering, railway construction, and civil engineering--were separated from the Ministry of Railways but remain state-owned. Five locomotive manufacturing companies have been merged into two huge groups, Northern and Southern.

The Northern group consists of the Dalian Diesel Locomotive Works and Beijing's February 7 Locomotive Works. The Southern group consists of the Qishuyan Locomotive Works, Ziyang Locomotive Works, and Chengdu Locomotive Works.