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June 05, 2009

Sergio De Luca signals a bright future

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Ansaldo STS, Italy, the only major signalling equipment supplier to concentrate solely on this activity, has ambitious plans to outperform the market. CEO Sergio De Luca, spoke to David Briginshaw in Genoa about his plans.

SERGIO De Luca (pictured) has a very positive view of the railway signalling market: "Some months ago the major question was how the financial crisis would affect our market. Our view at the end of last year was quite positive, but we were not 100% sure. Now, we are much more confident that the crisis won't affect our sector and we believe we can even benefit from the national financial stimulus packages."
While Ansaldo STS might be coming through the crisis unscathed, De Luca recognises that this is not the case for some of its private railway customers, particularly in the United States and Australia. One of the first casualties is the postponement of an innovative project by Rio Tinto - which has been forced to reduce output - to automate most of its 1300km heavy-haul railway in the Pilbara region of Western Australia. The project involves the installation by Ansaldo STS of automatic train protection (ATP) and automatic train operation (ATO), and ATO prototypes for the locomotives have already been delivered.
Although Rio Tinto would be the first operator to automate a heavy-haul railway, De Luca describes the project as "quite conventional" from Ansaldo STS' point of view. "It is more a problem of regulating the train operation rather than the technology," he says. "We gained a lot of experience with ATO with the Copenhagen metro, which is a fully-automated system. The metro achieves 98% availability and the 2% failure is usually the result of a mechanical failure of one of the trains rather than the ATO. So the extension of this technology to a heavy-haul railway is not a problem." The only major difference is that recovery from a failure on a heavy-haul railway in the Pilbara is a little different from a metro because of the distances involved and the remoteness of much of the line.
deluca.jpgDe Luca sees three main reasons for Ansaldo STS to be confident about the future: strong growth, the company's product portfolio, and its worldwide presence. First he points to general growth in the signalling and transport systems market, which is predicted to grow at about 7% a year worldwide. The signalling market is worth between €6 billion and €7 billion a year and is forecast to grow at between 5 and 6% a year. Although the transport systems market is worth between €3 billion and €3.5 billion, this is expected to grow more strongly at about 10% a year.
"Our commitment is to grow at 8% a year over a four-year period, as we expect to outperform the market by 1% a year, which I think is rather conservative as we have an excellent portfolio of products," says De Luca. The only problem for De Luca is that most of his competitors want to do the same. De Luca says Ansaldo STS is one of the leaders in Level 2 of the European Train Control System (ETCS), as the company's equipment is installed on all of the new Italian high-speed lines (Rome - Naples, Turin - Novara, and Milan - Bologna). Although Ansaldo STS is part of the Saturno consortium with Alstom equipping these lines, it is the majority partner. "Because of this success we were able to capture some business in China," he points out.
Ansaldo STS and Beijing HollySys, China, won a €61.8 million contract last year to install ETCS Level 2 on the Zhengzhou - Xi'an high-speed line. China plans to award contracts for ETCS Level 2 for another 4000km of high-speed lines in the next few months, for which Ansaldo STS and Bombardier are in the running. "This will be a huge contract," says De Luca. "It is impossible to think about projects on this scale in western countries." One of the drawbacks with ETCS is that a lot of the equipment has to be installed on the line. "You can't have balises on very long lines in remote areas or where snow is a problem, so you have to use another technology such as satellites," he explains. "We have a cooperation agreement with Russian Railways (RZD) to develop a Russian version of ETCS, called Itarus, which replaces balises with satellites."
For mass transit, De Luca says Ansaldo STS' good reference in Copenhagen enabled it to win other automatic metro contracts in Rome for the new Line C, Milan for the new Line 5, Brescia, Italy, and Thessalonica, Greece. "In April we won a contract for the first section of the new Circle Line in Taipei," he says. This 15.5km section is part of a planned 52km line, which will be fully-automatic and, unlike Copenhagen, based on communications-based train control (CBTC). Ansaldo STS is also working with Paris Transport Authority (RATP) on one of three CBTC pilot projects. "In order to have really good technology it is important to have a strong business relationship with a major customer," says De Luca. "We consider ourselves to be a leader in ETCS Level 2 because we have worked with Italian Railways (FS) and the same goes for CBTC because of our relationship with RATP." Ansaldo STS has four domestic markets: Italy, France (through the former CSEE), the United States (through the former Union Switch & Signal), and Australia. It is now establishing a fifth domestic market through its new subsidiary Ansaldo STS China. "We use these domestic bases as a springboard to enter other markets," says De Luca. "Our philosophy is be global from the technology point of view and local as far as the implementation is concerned."
Ansaldo STS also has exclusive commercial agreement with a systems integrator in China to sell CBTC in Chinese cities. Technology transfer is also envisaged. "If we win a contract from the Chinese Ministry of Railways, 40% of the contract value has to be local," says De Luca. "The idea is to have more control over the local content."
De Luca is trying to develop Ansaldo STS' transport systems business because this is showing strong growth. But the philosophy is to act as a general contractor by outsourcing other services such as telecommunications and power supply so that Ansaldo STS can concentrate on signalling, its core activity. De Luca believes firmly that the company's ability to select partners for a project is a strength rather than having to rely on in-house resources.
Ansaldo STS' business model seems to be working as its results are impressive. It recorded a 33% increase in profit last year, and a 49% increase in the first quarter of this year. It also achieved a huge surge in orders in the first quarter, boosting its order backlog considerably.
One of the drawbacks of being in a growth market is that there is a lot competition: there are seven major players in the signalling market as well as local suppliers. With ETCS and CBTC, the products are becoming more standardised, which De Luca believes will lead to a fall in profit margins. "There should be some consolidation in such a situation, but we have been saying that for years and it never happens," says De Luca. "If consolidation happens, we want to be one of the consolidators and not one of the consolidated. Ansaldo STS is the only purely signalling company - it is our only business. The company is listed on the Milan Stock Exchange and we have the financial structure that could ease consolidation."
So if consolidation does not happen, the only clouds on the horizon for De Luca are strong competition and the expectation that prices will start to drop.

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