Business

Japanese manufacturers face stiff competition from China in U.S. rail car market

by Keiichiro Otsuka

Kyodo

Japanese rail-car manufacturers are going up against increasing competition from Chinese rivals in the United States as they prepare for the opening of a bid expected later this year for cars that will be used on the planned high-speed rail link in California.

Last year, as Beijing orchestrated its policy to push railway exports, China CNR Corp., the world’s biggest builder of rolling stock, overtook Kawasaki Heavy Industries Ltd. and other bidders to supply vehicles in a project to renew Boston’s subway system.

Pricing by Chinese players appears to be a major hurdle for Japanese executives. “We may lose a market as a result of dumping-like price offers” from Chinese firms, said an official at a Japanese manufacturer.

CNR asked for $566.6 million to replace a total of 284 vehicles on the Orange and Red lines run by Massachusetts Bay Transportation Authority. That was around 37 percent below Kawasaki’s bid.

The Chinese company is triumphant about its American contract, saying on its website, “CNR metro cars will be landing (in the) United States and achieving (coverage of) six continents.”

According to official documents on the bid obtained by Kyodo News, CNR’s offer was sharply lower than the $720.6 million placed by runner-up Rotem Co. of South Korea.

Kawasaki tendered a $904.9 million bid, while Bombardier Inc. came in at just over $1 billion, nearly double CNR’s and the highest among the four that advanced to the pricing stage among six firms in the bid that closed in May 2014.

CNR is scheduled to deliver a test vehicle for the Orange Line in early 2018 and for the Red Line around a year later, followed by mass-production units to be shipped by 2021.

“It was a pity because we were so focused on winning this order but we just couldn’t compete with CNR in pricing,” a Kawasaki official said.

A widely held view in the Japanese industry is that the Boston victory will prove to be costly for CNR, given that vehicles must be assembled nearby to meet the job creation requirement in the contract and that the two lines run vehicles that vary in size.

A Japanese railway official even suggested that CNR’s bid “is no doubt a loss-making deal.”

Kawasaki has entered the U.S. market and has grown rapidly on the strength of product quality and reliability in meeting deliveries.

The company is credited with helping improve the image of the New York subway run by the city’s Metropolitan Transportation Authority after its first order of vehicles in 1982.

Kawasaki is the biggest supplier of vehicles in New York, having delivered more than 2,000 units. Kawasaki officials take pride in helping build the New York subway’s reputation for reliable performance.

Kawasaki has also won a deal to supply up to 748 vehicles worth around $1.48 billion for the Washington, D.C., subway system, where European manufacturers had been dominant suppliers.

Its vehicles started running in 2014. If all cars are delivered, Kawasaki will account for the majority of subway vehicles in the U.S. capital.

“We have made strides in quality and technology thanks to the Japanese railway companies we serve who are very demanding and discerning about quality,” said Hiroji Iwasaki, an executive officer with Kawasaki.

Meanwhile, CNR, the world’s largest rolling stock maker by sales, announced in December that it is merging with CSR Corp., the world’s second largest manufacturer, also from China, under an initiative encouraged by the Chinese government. The new entity is expected to be called CRRC Corp.

Chinese rolling stock makers’ marketing drives overseas were dented by a high-speed rail accident in 2011 in Zhejiang Province that Beijing says killed 40 people.

In the past few years, however, they have been stepping up efforts to win orders abroad. The merger of the two Chinese behemoths will likely boost their competitiveness against Japanese rolling stock firms.

By size, Japanese manufacturers are by no means in the league of CNR or CSR, the top two in the world in sales in the 2012 business year, excluding component sales and servicing revenues, according to data released in May by German rail consultancy SCI Verkehr GmbH.

None of the Japanese manufacturers including Kawasaki, Hitachi Ltd., Nippon Sharyo Ltd., Kinki Sharyo Co. and Japan Transport Engineering Co. was placed in the top 10.

A Japanese railway executive says the Chinese companies were helped by Kawasaki and East Japan Railway Co. (JR East) in making that much headway in the global marketplace.

Kawasaki and JR East provided China with technology underpinning the E2 series of shinkansen trains run by JR East.

Yoshiyuki Kasai, honorary chairman of Central Japan Railway Co. (JR Central), is apparently frustrated by the increased presence of Chinese players while Japanese manufacturers struggle, saying the technology transfer by Kawasaki and JR East to China “was tantamount to selling your country.”

Beijing says the country’s bullet train service that opened between the capital and Shanghai is based on “unique home-grown technology,” although many experts believe it largely relied on expertise from Japan and Europe.

Following the Boston subway deal, a group led by China Railway Construction Corp. won an order for Mexico’s first high-speed rail project between Mexico City and Queretaro in November.

This deal was subsequently voided in the face of an outcry from opposition lawmakers who accused the government of favoring the China-led consortium without allowing other companies to bid in a limited auction window.

For Japanese manufacturers, the stakes are high in the California high-speed rail plan. An alliance of Japanese companies including JR East, Kawasaki Heavy, Nippon Sharyo, Mitsubishi Heavy Industries Ltd. and Hitachi are planning to promote the shinkansen technology for the U.S. project.

Masaki Ogata, vice chairman of JR East, pointed out that California is an earthquake-prone region and is also tightening environmental regulations. “Shinkansen has all the advantages such as full-fledged measures for quake preparedness, safety, noise and environment conservation,” he said.

But rivals will likely highlight the Japanese technology’s potential high costs. “If it comes to pricing, Chinese manufacturers will be a threat,” said an executive from one of the companies in the consortium.

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