Bombardier addresses overcapacity

Railway Age, June, 2004 by David Briginshaw

Bombardier's recently-announced rationalization program for its rail transportation division was hardly a surprise, given the huge overcapacity in the European passenger rolling stock supply industry. The numerous mergers and takeovers during the last 15 years largely failed to address this.

Bombardier Transportation will eliminate 6,600 positions--18.5% of its workforce. The job cuts will result from the closure of four plants in North America and seven in Europe. This will still leave Bombardier Transportation with 28 rail equipment production sites in Europe.

The restructuring program will cost $C777 million ($US590 million), of which $C457 million has already been recorded during the last quarter of fiscal 2004, which ended Jan. 31. Bombardier Transportation expects to save $C600 million a year once the cuts have been implemented.

Although Bombardier as a whole had a turnover of $C21.3 billion during fiscal 2004, the company ended the year with earnings before tax of only SC10 million and a net loss of $C89 million. Bombardier Transportation's turnover for fiscal 2004 increased by 1.7% to $C9.6 billion, but the division made a pre-tax loss of $C353 million. Bombardier Transportation won orders worth SC15.7 billion during fiscal 2004, and had an order backlog worth $C31.4 billion.

"This restructuring initiative is part of a three-year strategy to bring back improved margins and profitability to this company," said Paul Tellier, Bombardier's president and CEO. "The urgency to move now at Bombardier Transportation has been underscored by disappointing financial results from the division in the last quarter of fiscal year 2004. Plant efficiency is not adequate, with certain facilities operating at barely 50% capacity."

Bombardier Transportation has already ceased or suspended production at four North American locations: Kingston, Ont., Burnaby, B.C., Barre, Vt., and Pittsburg, Calif. It agreed to build the Burnaby plant as part of the contract it won in 1998 to supply more trains for an extension to Vancouver's SkyTrain automated light metro. The British Columbia provincial government was keen to secure jobs, and Bombardier Transportation was happy to oblige, even though the cars could easily have been built at existing plants.

This year Bombardier Transportation will close three European plants at Amadora, Portugal, and Doncaster and Derby Pride Park in Britain. The remaining European plants will close next year. These are at Pratteln, Switerland; Ammendorf, Germany; Kalmar, Sweden; and Wakefield, Britain. On the other hand, five of the remaining European plants will be in the first wave of a worldwide program to reduce production costs and improve efficiency.

Until the late 1980s, Europe's railway supply industry was characterized by numerous small and medium size companies supplying the national railroad in their own country. Virtually every European country had at least one supplier, and many had several. Merger mania started in 1988 when ASEA, Sweden, joined forces with Brown Boveri, a Swiss-German manufacturer, to form ABB. Other companies were acquired, such as BREL in Britain, as the group expanded. Eventually, the rail division of ABB was merged with AEG, Germany, in 1996 to form Adtranz, as a subsidiary of Daimler-Chrysler. During this period, attempts were made to rationalize the largely loss-making business, but with little effect.

Bombardier started down the acquisition trail in the late 1980s and gradually swallowed up companies such as UTDC, Canada; BN, Belgium; ANF, France; BWS, Austria; and Talbot and DWA in Germany. Its biggest takeover was that of Adtranz in 2001.

The problem for these companies has been the pace of acquisitions and mergers. No sooner had one company been acquired, than negotiations were under way for the next takeover. This left little time for proper assimilation and reassessment of the expanded company's new goals.

The acquisition of Adtranz proved to be far more difficult than Bombardier's managers had envisaged. Not only was Adtranz in a worse financial condition than expected, but there was also a culture clash.

For example, Adtranz had spent a lot of time developing its so-called product platforms to try to move the industry away from tailor-made trains. Bombardier Transportation, on the other hand, had a more pragmatic and flexible approach to train design. Bombardier Transportation had very strict guidelines for bidding for new contracts, whereas Adtranz was more interested in winning market share than profitable orders.

It is only now, with Paul Tellier at the helm of Bombardier, that the company is seriously addressing some of the problems that previous managers failed to tackle. Tellier came to Bombardier from Canadian National, where he turned a government-owned railroad into a successful private company. He is now trying to return Bombardier to the level of profitability it used to enjoy.