China's High Speed Rail Industry on the Fast Track

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In an article last week we explored the possibility that many of the jobs we had expected to materialize from “green tech” industries such as wind and solar power would in reality end up in China as manufacturers in those markets are given support and subsidy to assist them in exports around the world. In a separate article this week we discussed trends in the high tech aviation industry, until recently considered the preserve of technologically advanced western nations. The common thread linking these previous articles and what follows is that times are a changing, and they are changing fast. Where we had assumed somewhat arrogantly that a mixture of inventiveness, entrepreneurial spirit and technological sophistication would keep us one step ahead of low wage Asian competitors at least in the more sophisticated “knowledge economy the fact is we are being challenged at every turn. I don’t want to sound like a doomsayer, this is not the end of western civilization. Emerging markets such as China are not without their own problems in other ways but what is clear is that the 5-10 year lead we felt we had is fast disappearing because Asian suppliers are using technology transfers into their home market linked with lower manufacturing costs and the easy availability of mind bogglingly large sums of finance to give western firms a run for their money in the global market place.

No better example exists than the rail industry. As a Financial Times article explains, the world’s big-three passenger train manufacturers Siemens of Germany, France’s Alstom and Canada’s Bombardier along with GE and Caterpillar’s EMD Division, the dominant forces in diesel locomotives, have long bet advanced technology would keep them on top of the world’s rail supply market. But as Siemens realized when they recently bid to supply high-speed trains for Saudi Arabia’s inaugural high-speed rail project between Mecca and Medina they were being out bid by a Chinese consortium and to stay in the race they had to join in with the Chinese.

The Chinese producers ability to undercut western manufacturers and in many cases to provide solutions that do not require the same level of technological sophistication as European or North American buyers expect will mean major infrastructure projects in Africa, South America and wider Asian markets will go their way. There have been reports that suggest Chinese technology has not been as reliable as western suppliers but that gap will narrow as Chinese manufacturers learn from the technology transfers that are an integral part of western companies being allowed to supply to China’s own massive rail development projects. Technically under the technology transfer agreements that technology may not be then used in export contracts but it is entirely possible that a modification to a design or technique can circumvent such restrictions or that greater understanding of the technologies involved could allow Chinese designers to engineer alternative solutions that do not blatantly infringe upon any agreements.

Peter Ulrich, of the Boston Consulting Group, who oversaw production of a rail market report commissioned by Unife, the European railway industry association, is quoted in the FT as predicting a slowdown in average annual growth rates in Asia’s rail markets to just 2.5% around the middle of this decade. That could leave Chinese factories supplying China’s high-speed network with significant spare capacity. Will they scale back capacity or will those companies look for opportunities outside China? What do you think?

–Stuart Burns

Comments (3)

  1. Paul Adkins says:

    Stuart,

    China’s rail construction companies already are seeking external business opportunities. They have a huge contract (US$3.5 billion if I remember well) to supply 78 double decker carriages to Sydney Australia.

    but the point that you miss in your stories, and the point of this deal, is that the Engineering company that won the order from the State Government in Australia are the ones who chose to outsource the fabrication work. Several hundred workers in the Australian factory that had hoped to get the fabrication work now find themselves without a job, thanks to another Australian company choosing to take the work offshore.

    You accuse the Chinese of costing jobs in the USA, but American and other western manufacturers were the ones who first went to China and invested billions in new factories. You talk of a trade war, but American industrialists are the ones who started with the friendly fire a decade ago.

    China has a lot to answer for in regard to many issues, but if you are going to criticise, be fair about it.

    1. admin says:

      Hi Paul, thanks for all of your thoughtful comments. I can’t comment on the rail story as I have neither wrote it or researched it.

      I’m not clear how American investment in China started or caused the trade mess we now, as Americans find ourselves in. Entrepreneurs will invest anywhere where they perceive a favorable business climate with profit potential. I think we have to challenge ourselves to look deeper at the evolving political landscapes in both countries. For example, we Americans need to ween ourselves from cheap imports (which we have become addicted to just like fast foods, disposable everything and fad diet pills); this crack-like dependency has turned out to crush our country (note why Wal-Mart is spending the big bucks lobbying against currency reform). But China’s currency policies exacerbated the issue…one only need to look at the exchange rates from 1981 to see how that has changed over time (and of course, there is no freely floating currency). I am convinced China has cost us jobs – partly from the currency and other predatory trade practices which if the WTO actually had any teeth would likely find in favor of the Americans on many fronts, but partly from our own dependencies on cheap imported crap, to be blunt. Check out this article from today’s WSJ: http://online.wsj.com/article/SB10001424052748704394704575495480368918268.html?mod=WSJ_hps_LEFTWhatsNews

      Can the Americans get away with such ruthless policies? Hardly.

      So let me ask you this Paul, do you think China has lived up to its WTO obligations?

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