The size of the global railway market for equipment and services has increased from €162bn in 2014 to €169bn although the annual rate of growth has slowed from 3.4% in 2014 to 2.3% this year. A notable development which emerged in 2015 is that the after-sales market with a share of 53% is now larger than the original equipment market (OEM). This reflects the heavy investment in rolling stock and network expansion which has taken place in the last few years, with much equipment now due for overhaul. The after-sales market is set to surge ahead of OEM as its annual rate of growth is only 1.3%.
There has been a significant change in growth rates around the world during the last two years. While annual growth in the €44.4bn Western European market remains unchanged at a healthy 3.2%, the slowdown in the freight market in North America has cut growth from 3.3% in 2014 to 1.4% this year. Central and South America is performing particularly badly where a 1% annual growth rate has switched to a contraction of 2%. The €51.6bn Asian market has also seen a reduction in annual growth from 4% in 2014 to 2.6% in 2016. Conversely the rail market in Africa and the Middle East is growing the fastest at 7%, although this is less than the 10% growth rate recorded in 2014.
The main line passenger and freight markets are of similar size, each worth in excess of €40bn, but the passenger market is growing at 2% a year compared with an annual growth rate of just 1% for freight which has been affected by the global reduction in demand for minerals, the mainstay of many rail freight operators. While the urban passenger rail market is worth less than €20bn it is growing at 4% a year, twice that of main line passenger, due to the steady expansion of urban rail networks as cities strive to reduce road congestion and pollution.
The structure of the global rail market is changing as we enter another period of consolidation through mergers and acquisitions, which SCI Verkehr believes is likely to accelerate. Two component suppliers, Knorr Bremse and Wabtec, have both expanded rapidly due to a policy of acquiring smaller companies to extend their product portfolios. These companies currently rank seventh and eighth in the top 10 railway equipment suppliers, while Wabtec is set to become even bigger with its imminent takeover of Faiveley, a major competitor to Knorr Bremse in the braking market.
SCI’s company survey is a little harder to interpret than its study of the global rail market as there are a number of conflicting forecasts by senior managers. However, there are some concrete pointers such as employment which, after 18 months of decline, has shown a healthy increase in the second half of this year, although 27% of managers expect employment to decline compared with 19% who think it will continue to increase.
As far as the current business situation is concerned, the number of managers who describe business as good has dropped from 40% last quarter to 31% this quarter, while the number of negative assessments has almost tripled to 23%. Nevertheless, the outlook on balance is still positive.
Conversely, demand is perceived as growing steadily during the last year and appears to be gaining momentum at the beginning of the second half. This is encouraging what SCI describes as moderate optimism among top rail industry managers. While 62% of companies do not expect any change in business, 14% are more confident about the future.
The survey also highlights some of the obstacles to growth which are currently confronting the industry. Factors of increasing concern which are squeezing profit margins include fluctuations in exchange rates, pressure on prices due to increasing competition, and regulatory restrictions and in particular complex certification procedures. Conversely, rock-bottom interest rates appear to have lost their effect in helping to stimulate investment.
Due to its sheer size, InnoTrans is also a bellweather for the health of the railway market. This year it will be bigger than ever. The number of exhibitors has increased from 2700 from 51 countries in 2014 to 2940 from 60 countries this year, with around 200 companies exhibiting for the first time.
While there are always uncertainties in the world, overall the railway industry is in better shape than many others as it is protected somewhat from major economic fluctuations due to the long-term nature of investment, and the growing perception that investing rail is good for environment. Rail has also come to the attention of the huge pension funds looking for somewhere stable to invest, which bodes well for the future.