January 20, 2016

Europe’s chance to bolster a flagship industry

Written by  Phillipe Citroen
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THE European rail supply industry is a diverse and geographically-widespread industry comprising thousands of SMEs and major industrial champions. Employing around 400,000 people throughout the European Union (EU) and with absolute sales of €47bn per annum, it accounts for 46% of the global accessible market for rail products.

This world leadership is attributed to its R&D capacities as well as a reputation for high quality. Indeed, innovation has been at the heart of this European industry which currently invests 2.7% of its annual turnover into R&D.

Phillippe CitroenAs Unife's 2014 World Rail Market Study shows, the good news is that rail markets will continue to grow on all continents and there are therefore great business opportunities for European suppliers to seize. However, European companies face a critical challenge to their global market leadership with competition from Asia - especially China - becoming increasingly fierce. This was highlighted by the European Commission's Directorate General Enterprise and Industry in its 2013 Sector Overview and Competitiveness Survey of the Railway Supply Industry. Two years later, the rapidly-evolving situation has become a serious cause for concern for all European suppliers, which face the prospect of having to adapt to different technical environments while also competing in a single market with a growing number of European as well as non-European players. This high level of competition brings the challenge of lower margins.

Alongside intensifying competition, Europe's rail suppliers face increasingly-restricted access to some significant markets. Closed domestic public procurement markets provide certain non-European competitors with massive resources that enable them to bid more competitively and take on more risks in the European market, and in other markets where EU suppliers are present. In some cases, they also benefit from competitive financing as state-owned companies, making the rules of the commercial game even more asymmetrical.

The merger last year between CNR and CSR, the two biggest Chinese manufacturers (with combined sales of $US 31.7bn in 2013) rang alarm bells in the European industry. This merger resulted in the formation of the CRRC Corporation, the world's largest train builder at twice the size of its largest European competitor. Not only does its size and state-sponsored position enable it to benefit from higher combined revenues, increased purchasing power, profit accretion, economies of scale and strong pricing power, it has privileged access to the huge and protected Chinese domestic market.

In this context, Unife welcomes the decision of the European Parliament's Industry Committee (ITRE), under the initiative of MEP Mrs Martina Werner, to prepare and adopt in 2016 an official resolution on the competitiveness of European rail supply manufacturers, which would mobilise EU institutions to take action on the issue.

This will be a unique opportunity to discuss and define at the European level - for the first time ever - a European industrial strategy to safeguard the world leadership of the European rail industry. During an important event in October 2015 organised in the framework of this future parliamentary resolution, former Unife chairman Dr Lutz Bertling outlined a sectoral strategy for the European rail supply industry based on existing European strategies for car and ship-building industries. This identifies three pillars for an EU co-ordinated industrial strategy to boost the competitiveness of the European rail supply industry.

The first consideration is how the EU could help "strengthen the offer" by enabling European suppliers to continue offering the best products on the world market. Secondly, it is essential to work on improving the business environment in the EU and internationally to ensure that European suppliers can produce and sell their products in fair market conditions. Yet producing the best products and a satisfactory business environment will ultimately be fruitless if there is no demand for rail products. Stimulating demand in the EU and globally is the critical third pillar of the strategy.

When it comes to strengthening the offer, the support of the EU can be instrumental in fostering research and innovation and developing skills and talent. In this respect, it will be essential to ensure all of the R&D activities of the newly-established Shift²Rail Joint Technology Initiative are launched this year. Moreover, building the best-quality and most energy-efficient rail products also requires Europe to invest in human capital - as there is currently a skills shortage - and adapt production capacities to new realities, including new technologies and evolving markets.

Concerning the business environment in Europe and internationally, EU action is indispensable when it comes to both improving the internal market and enhancing the industry's ability to export through improved market access abroad. Establishing a well-functioning internal market will undoubtedly make the European rail industry stronger.

By creating a streamlined and efficient process for rolling stock authorisation with the European Railway Agency (ERA), the Technical Pillar of the Fourth Railway Package will play a key role in this regard, which is why the EU institutions must proceed to its final adoption and implementation as soon as possible. Likewise, Unife urges EU member states to implement the 2014 Public Procurement Directives which will put an end to the "dominance of the lowest price" and ensure that quality and life-cycle are given due consideration in the public procurement of rail products.

Regarding exports overseas, while the EU is recognised as one of the most open and transparent global trading partners in the world, the European rail industry still faces discriminatory barriers or difficulties when trying to enter certain major markets. For instance, the market access situation in Japan stands in stark contrast with the EU's, where Japanese rail suppliers have been awarded major contracts. The support that the EU can provide for a level playing field - through bilateral free trade agreements with Japan (see below), the US and the investment agreement with China - is essential.

More generally and considering their vital importance, Unife hopes that this parliamentary resolution will also be the occasion to recognise the role of rail-supply SMEs while outlining a strategy to improve their prospects.

Finally, stimulating demand for rail products will be of equal importance to securing economic opportunities for European suppliers. In this respect, the EU together with all of its member states, regional and local authorities play a key role through the public grants they provide for rail projects.

But while public financing is of central importance to enabling rail projects, it is now also essential to work together with the EU Institutions and the European Investment Bank to ensure that EU initiatives aimed at mobilising private investment for strategic projects will also benefit the rail sector in Europe. This is Unife's aspiration for the new European Fund for Strategic Investment. Last but not least, European transport policy that further boosts the attractiveness of rail and promotes modal shift is imperative to stimulate demand for rail products.

The European rail industry aims not only to maintain the leadership of the global market but also continue to build a more attractive railway system that encourages a shift to rail transport around the world. With such a modal shift, the environmentally-friendly and societal virtues of rail can be fully unleashed and play a central role in the reduction of CO2 emissions in a world with an increasing demand for mobility.

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