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Europe-China rail competition – "Bigger is better"?

Europe-China rail competition –
 Viviana Zhu
China analyst, former Research Fellow, Institut Montaigne’s Asia Program

On February 6th, the European Commission blocked the Alstom-Siemens merger, putting an end to an initiative that its advocates justified by concerns regarding China’s competitiveness on export markets in the rail industry. The European Commission concluded that "it will take a very long time before they (Chinese suppliers) can become credible suppliers for European infrastructure managers." Is Chinese capacity over- or under-estimated? Has China been able to prove that "bigger is better"? As the existence of the Chinese rolling stock champion CRRC is one of the main arguments advocating of the Siemens-Alstom merger, this analysis looks at what Chinese sources have to say about CRRC’s international expansion. And while CRRC was created with export markets in mind, Chinese commentaries are overall very cautious at this stage. 

A merger of this scale in the railway sector is indeed a familiar story in China, where the CNR Group and the CSR Group completed their merger in June 2015 to form CRRC Corporation Limited, the world’s leading rolling stock supplier. The merger has created a giant with an annual revenue greater than Siemens, Alstom and Bombardier combined, and a 30 percent share of the global rail market given its monopoly of the vast Chinese domestic market. Domestic monopoly and demand are the driving forces behind CRRC’s significant annual revenue, as its domestic market contributed 90,89 percent of the company’s operational revenue in 2017. Dependency on the domestic market seems no longer sustainable as it saturates and domestic demand for railway equipment decreases. CRRC’s operational revenue, generated in China, has been falling for two consecutive years, by 2.17 percent in 2016, and 8.96 percent in 2017. CRRC is thus forced to look elsewhere.

The merger has created a giant with an annual revenue greater than Siemens, Alstom and Bombardier combined, and a 30 percent share of the global rail market.

CRRC had set its sights on international markets to promote "High-End Made in China" products. "We've ventured out into the foreign markets, successfully innovated our business model, and gained a foothold in the U.S. market, where CRRC has become China's 'golden business card," said CRRC President Liu Hualong. In 2016, Cheng Dayong, General Manager for International Business at CRRC, set a target to expand CRRC’s international business to one-third of its total revenue by 2025. While the growth forecast for China’s domestic rail market is negative until 2022, the overseas market is expected to grow by 3.5 percent annually.

CRRC already has a large global footprint, with projects in more than 100 countries. Recent years have seen rapid growth of the company’s international business. For example, from June 2015 to November 2016, its overseas markets have grown from about 90 countries and regions, to 102, accounting 83 percent of countries and regions with railroads. This is in accordance with the company’s motto to "go abroad" (走出去) and take advantage of the Belt and Road Initiative to win connectivity infrastructure contracts worldwide. Most of these contracts consist of diesel locomotives, coaches and wagons, but CRRC is also winning contracts for electric locomotives and urban transportation systems, expanding even to Europe and the United States. In recent years, some of CRRC’s signature wins overseas have a $10 million order of underground-train parts from Transport for London (2016), a $178 million deal with the Los Angeles County Metropolitan Transportation Authority (2017), or a $278 million contract with Argentina's Ministry of Transport (2018). 

But CRRC’s international strategy is facing difficulties and has already encountered major setbacks.In 2017, the completion rate of signed export contracts was only 63 percent, and the value of contracts signed in the first three quarters of the 2018 amounted to only 20 percent of the annual target. CRRC is not a stand-alone case, China’s railway equipment companies have all recently received a reality check. For instance, CRSC (China Railway Signal & Communication Co., Ltd) signed only 10 percent of its 2018 overseas annual target in the first half of the year. 

This is particularly true of the crown’s jewel for export markets, i.e. high speed rail (HSR), in which a number of Chinese companies are active: CRRC, CREC,CRCC, CMC, etc… A joint report by the Financial Times and CSIS in 2017 revealed that among the eighteen China-invested or funded high-speed rail projects, only one has been completed, and seventeen were at different stages of planning and construction. From the awarding of the project until the opening of the line, the Ankara-Istanbul Line took more than 8 years to be completed, while such a project would have only taken three to four years in China. Two years later, only one more project was completed (the Haramain Line connecting Medina and Mecca), while the remaining projects have made little progress.

 ProjectStatus in 2019
4Medina-Mecca (Haramain Line)Operational
5Jakarta-Bandung (Indonasia)Delayed
6Vientiane – Kunming Underway
7Bangkok-Nong Khai  (Thailand)Underway
8Bangkok - Kuala LumpurDelayed
9Tehran-Mashhad (Iran)Signed
10Kuala Lumpur - SingaporeDelayed
12Phnom Penh – Sihanoukville Signed
13Karachi- Peshawar (Mainline-1)Delayed
14High Speed 2 (HS2)Delayed
15Puerto de Ilo / Brazil - Puerto Santos / Peru (Central Bi-Oceanic railway)Signed
16Yekaterinburg - Chelyabinsk (Russia)Signed
17Muse - Mandalay Delayed 
18Samara - Togliatti Signed


From a Chinese perspective, a Siemens-Alstom merger would have indeed added pressure on CRRC. A CRRC source worried that "The Siemens-Alstom rail merger will affect CRRC’s international business environment, curb the pace of CRRC’s internationalization to a certain extent, and further increase the entry barrier of the European market for CRRC." The commercial councilor of the Chinese Embassy in Germany, Weidong Wang noted that "being backed by two major countries, Germany and France, will not only lead to an increased ability to win tenders and to secure financing in Europe, but also gains in cost reduction and development resources." Such an assumption mirrors the Chinese domestic narrative that the CNR/CSR merger resulted in gains in cost reduction (1+1<2) and performance (1+1>2). But it overlooks the issue of excess capacity in the follow-up of the merger, a problem still to be solved, and remains silent on the question of subsidies.

Setbacks to overseas projects and the costs incurred to address problems have already created quite a burden on CRRC. For instance, to overcome the current difficulties while operating in international markets, CRRC identified the need to "localize / melt inside (融进去)". The previous modus operandi, consisting of manufacturing in China before shipping products overseas, was not sufficiently attractive because recipient countries want more benefits, primarily in terms of employment. Consequently, CRRC has established overseas manufacturing bases in the United States, Australia, South Africa, Malaysia, India, Turkey and other countries. Localization comes with a price, leading to an increase in production cost.

Setbacks to overseas projects and the costs incurred to address problems have already created quite a burden on CRRC.

When asked about the Siemens-Alstom merger against CRRC, the Chinese envoy to the European Union, Zhang Ming, told the Financial Times, "In a market economy, we have cooperation and we also have competition. So we do not reject competition…Our world provides a very big global market. There is not simply one single player like Alstom, Siemens or the CRRC."And more than European competitors, China is facing a fierce competition from Japan regarding infrastructure development in third countries. Take the HSR as an example. In Indonesia, China won the Jakarta – Bandung project, but the Jakarta- Surabaya project was awarded to Japan. In Thailand, China is constructing the Bangkok-Nong Khai HSR, while Japan signed the Bangkok - Chiang Mai HSR project. In short, with regards to export markets, CRRC has not yet proven that "bigger is better".

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