The Market for High-Speed Trains Stays the Course
China is racing against the rest of the world with high-speed trains. An annual market volume of more than EUR 12 billion is on the line.
Ten years ago, experienced train builders from Siemens (G), Alstom (F), Bombardier (C), and Kawasaki (J) were called in by China to assist in development. Now China is ready to go it alone. Instead of the government-owned companies CSR and CNR doing battle, China's two biggest train manufacturers merged at the end of last year. According to a news release from the Shanghai stock exchange, the merger will "create a new cross-border, globally leading provider of premium rail machinery." Bloomberg states that the new industry giant, with more than 170,000 employees, has a market value of USD 26 billion. SCI Verkehr in Hamburg, a consulting service specializing in mobility, estimates the global market share to be 48 percent (CSR 30 and CNR 18 percent).
In ten years to the top
In just ten years, the Chinese have managed to build a high-speed network that is now more than 10,000 km long – the longest high-speed route in the world. It connects Beijing with Guangzhou. The train travels 2,300 km in less than 10 hours, meaning a speed of 300 km/h. The project was stalled due to a massive bribery affair, and in 2013 the former railway minister Liu Zhijun was given a suspended death sentence. However, it now seems that the Chinese are ready to work on foreign expansion as the domestic market is soon to be saturated. They are relying on their own technology to do so. While they had agreed on patents with Western train manufacturers for any foreign projects, these are gradually expiring.
Emerging markets on the horizon
The Chinese are not focusing primarily on the European market, but rather Asian countries (Cambodia, Vietnam, and Thailand), along with the Middle East (Saudi Arabia), Africa (Nigeria), South America (Brazil), Argentina, Mexico, and Russia. Credit Suisse analyst Simon Toennessen, who specializes in Siemens and Alstom in the transport sector, also feels the greatest growth potential lies in the emerging markets. A railway infrastructure could also develop in the US. "The Western European market is much more saturated," says Toennessen. "The focus there is less on infrastructure expansion and more on modernization and improvement."
The Chinese have already signaled their interest in an RFP for a planned high-speed rail route in the state of California. By 2029, the San Francisco-Los Angeles route will take less than three hours. California's voters said yes to this USD 68 billion project in 2008, and for Toennessen it is just a matter of time until the Chinese gain their footing in the US. "They've already signed contracts for subway trains and the building of manufacturing plants – the next step is high-speed trains," he forecasts.
Luxury ride to Russia
In Russia, the Chinese are already a step ahead. According to Credit Suisse analyst Edmond Huang, the declaration of intent signed by China's premier Li Keqiang and his Russian colleague Dmitry Medvedev for a high-speed route from Moscow via Nizhniy Novgorod to Kazan is a breakthrough for the Chinese in foreign business. The city on the Volga, and the capital of the Republic of Tatarstan, is one of 13 locations for the 2018 FIFA World Cup. The 770-kilometer route will cost USD 23.9 billion and is set for completion before the World Cup begins. The maximum speed is 400 km/h; on average the train will run at 223 km/h. Huang assumes that this will be only the first stage of the 7,000-kilometer luxury route from Moscow to Beijing. "The total travel time would be reduced from six to less than two days, and bring the two countries much closer together," says Huang. According to the Beijing Times, the route could be finished in five years for about EUR 180 billion.
Both Credit Suisse analysts are confident that China's opportunities in Russia and other international markets are great, particularly as train production costs are lower (up to 50 percent) than for European competitors.
In spite of China's growth plans, the experts at SCI Verkehr believe that global demand will drop somewhat in future. The great need for high-speed trains in China and Japan has caused record-breaking production, according to SCI. By 2018, market sales for new trains are likely to drop from EUR 7.3 billion to EUR 5.3 billion per year. However, in the same time period, the expenses for the after-sales market (maintenance, etc.) would grow from EUR 4.3 billion to EUR 6.9 billion, for a total market volume of EUR 12.2 billion. Amazingly enough, as recently as 2006 the market volume for new trains was EUR 2.2 billion and in 2008 it was EUR 3.2 billion.
Long-term risks for Europe
After China, the market leaders are Japan with 17 percent (mainly Hitachi, Kawasaki, and Mitsubishi), France's Alstom with 12 percent, and Germany's Siemens with 6 percent. Among the other providers (17 percent) are Canada's Bombardier and Spain's Talgo. SCI Verkehr states that about 90 percent of the approximately 3,200 trains in operation around the world are located in the seven largest markets: China, France, Japan, the UK, Germany, Spain, and Italy.
"We feel that Western Europe will stand up the longest against the Chinese competition," insists Toennessen. The market to date has been rather well-protected, due to the stricter regulation requirements and the strong, regional leaders such as Siemens in Germany and Alstom in France. However, the Credit Suisse analyst warns that "We see certain risks for the long term. Some months ago, the Chinese prime minister began to market Chinese manufacturers of high-speed trains in Germany." Maria Leenen, CEO of SCI Verkehr, also sees some weak spots among the European manufacturers. The market is too broadly diversified, she says. "Everyone is developing a small number of their own trains, which is ultimately inefficient," she criticizes. Recently, Germany's Siemens (ICE) wanted to form a joint venture with France's Alstom (TGV) to launch a "European champion," but the negotiations failed. Leenen could think of another promising merger: Siemens and Switzerland's Stadler Rail.