April 12, 2016

CRRC aims for Europe

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Formed following the merger of Chinese state-owned companies CSR and CNR in June 2015, CRRC is by some distance the world's largest rolling stock manufacturer. While its rise is based largely on demand from its vast domestic market, the company is now engaged in a push to boost exports, as vice-president Weiping Yu reveals in an exclusive interview with Kevin Smith.

TOWARDS the end of his speech at the Fourth Railway Forum in Berlin on February 29, Dr Weiping Yu, vice-president of CRRC, presented two maps to the watching delegates, one of China's now 19,000km high-speed network, and another showing proposed high-speed connections in Europe.

Yu said that given the pace at which China has built its network since 2005, and Europe's struggles to develop a similar sized network over a much longer period, Chinese companies, including CRRC, could help to solve what he perceives as "Europe's problems."

CRRC"We want to share with others what we have learnt and what we have done to say thank you for helping to develop Chinese high-speed trains," Yu said. "We want to cooperate with European customers to develop high-speed trains so there is less threat to the environment and so that together we can deploy smarter trains."

Audacious? Certainly. Erroneous? Perhaps. Europe is, after all, a complex and fractured railway market. But his sentiments reflect the burning ambition at CRRC to become active in each of the world's railway markets and secure 20% of its business, or around Yuan 20bn ($US 3.07bn) annually, from international projects in the next five years.

Speaking exclusively to IRJ, Yu said that CRRC understands that each market is unique and moves at its own pace. However, he said it is important the company does its groundwork so that its prospective customers know what they have to offer. He was in Berlin fresh from a trip to the north of England and used Britain as an example to highlight this point.

"We see a very big demand for high-speed trains to operate High Speed 2 (HS2) between London, Birmingham, Manchester and Leeds," Yu says. "They need these high-speed trains to help the economy move ahead, but according to the government's plan, the first high-speed trains for HS2 will not operate until 2026. Every market is important to CRRC but all have different time requirements on when you might be able to enter."

CRRC as a company was officially born on June 1 2015 following the merger of China Northern Rolling Stock Company (CNR) and China Southern Rolling Stock Company (CSR). These two state-owned behemoths had firmly established themselves at the top of the rankings of global rail equipment manufacturers in the previous five years. SCI Verkehr's 2014 railway industry market study found that both companies had new vehicle revenue approaching €12bn in 2013-14, streets ahead of Bombardier in third place with nearly €7bn.

But with the Chinese government keen to develop its exports, and with rail one of 10 focus industries targeted for growth, it increasingly found the companies were competing with each other for international contracts. As a result, the decision was taken in 2014 to merge and integrate the resources of the two companies to become CRRC, a process which took nine months to play out.

Market demands

The new company consists of 51 individual subsidiaries and employs 182,000 people, 6000 of whom work outside of China. Yu says that there are "no plans yet" to streamline these subsidiaries stating that any interior integration is dependent on the demands of the market.

He added that the company is listed on both the Shanghai and Hong Kong stock exchanges for the purpose of the "company's development," which is now focusing on four primary market areas: main line, urban transport, new energy, and modern service.

"As well as maintaining our advantage as a manufacturer of railway equipment, we are developing our business to focus on other sectors like new energy, automotive and wind power generators, environmental protection equipment and other complex materials," Yu says. "CRRC has set up an electrical suppliers' platform. We have also invested in facilities for leasing rolling stock, financing and maintenance services."

In its most recent results for the first half of the 2015 financial year, which were published in September 2015, CRRC reported revenues of Yuan 91.8bn, an increase of 6.26% compared with the combined performance of CSR and CNR in the first half of 2014. Its overseas revenues increased by 61.2%, which followed a 22.6% increase in 2014, and profit attributable to the owner was just under Yuan 4.7bn, an increase of 6.85%.

CRRC has an almost 99% share of its domestic rail equipment market, which continues to account for 88% of its revenues according to the September 2015 figures. But with the pace of the domestic high-speed development programme beginning to slow, it is increasingly looking beyond its borders to secure long-term sustainability.

Yu says that in 2015 CRRC was active in 101 countries and listed several Chinese achievements during the year from which CRRC could benefit, including the Jakarta - Bandung high-speed project in Indonesia, and projects in Laos and Hungary. He added that proposals for Russia's high-speed project between Moscow and Kazan, including a localisation element, are under discussion, and that CRRC has secured an initial cooperation agreement for the California high-speed project in the United States.

Also in the United States, one of the most noteworthy recent deals was the $US 566m contract from Massachusetts Bay Transportation Authority in October 2014 to supply 284 metro vehicles to Boston. The deal includes building a new factory in Springfield, Massachusetts, and Yu says work is underway and progressing well on the plant which is on course to open in spring 2018.

Success in Boston was followed with the news last month that CRRC was selected for a $US 1.31bn contract to supply 846 metro cars to Chicago Transit Authority (CTA). The deal includes opening a manufacturing plant in the city, which will create 170 new jobs.

"CRRC's policy is to enter the market and then stay there and make friends with the local government and the local people," Yu says. "We want to be a good enterprise, which creates job opportunities, and increases tax benefits for local governments."

The new US plants follow the creation of similar manufacturing facilities in Turkey and Malaysia in recent years. Yu says that CRRC also has ambitions to establish a manufacturing base in Europe and is considering both joint ventures and independent investment to achieve this goal.

CRRC's emphasis on the European market is evident in the recent acquisition of two European firms. The £120m purchase by CRRC's CSR Times Electric subsidiary of Specialist Machine Developments (SMD), Britain, a manufacturer of remote intervention equipment including subsea remotely operated vehicles, a sector in which CRRC is making significant strides, was confirmed in September. Subsidiary company Zhuzhou Times New Material similarly bought ZF's Rubber and Plastics business unit in April 2014.

While it has limited itself to smaller companies thus far, there have also been persistent rumours about CRRC's interest in purchasing an established European rolling stock manufacturer.

Stories that it was ready to acquire a controlling stake in Bombardier were quashed in June 2015, and CRRC was linked with AnsaldoBreda before Hitachi finally acquired the Italian manufacturer in November 2015. Stadler was also reportedly approached by a Chinese state-owned firm earlier this year, which led CEO Mr Peter Spuhler, who holds 83% of the company's shares, to inform the Swiss press last month that he had no intention of selling the company.

While not referring to any specific deals, Yu did confirm that CRRC is considering further acquisitions. "So long as it is a policy of CRRC that will improve its position in the market, and conforming with the requirements of developing CRRCs business, there is no doubt that CRRC will be willing to acquire other enterprises," he says.

Certification

Part of the reasoning for the rumoured interest in Stadler offered by Spuhler was for the bidder to gain a greater understanding of national licensing procedures in Europe. Indeed questions remain whether CRRC's current range of products are able to meet Europe's tougher certification requirements.

However, Yu was keen to downplay the issue. He says that the company's understanding is based on the input of European and Japanese engineers who clearly complied with the regulations when developing their products.

"When we started developing our technical systems, we absorbed three main manufacturers' technologies," Yu says. "From Europe we have brought in the technology of Siemens and Alstom, and from Asia we imported the technical expertise of Kawasaki as an Asian technical system. We have developed our independent products and innovation on the basis of European standards. That's why it is not difficult for Chinese to produce European-standard rolling stock, not only for high-speed trains but for other products. For example we passed the TSI a few years ago for our tank wagons."

Throughout the interview and during his presentation, Yu reiterated the desire of CRRC to take the lead in developing the next-generation of environmentally-friendly rolling stock and railway systems. Inevitably research and development has played a critical role in delivering CRRC to its current position, and will remain crucial to its future. The company invested Yuan 3.7bn in the first half of 2015, an increase of 19.4% compared with Yuan 3.1bn invested in the same period in 2014, and Yu says this upward trajectory will persist.

"For R&D CRRC emphasises developing intelligence that will provide leading technology," Yu says. "This R&D must be carried out for our advantage but also to meet customer demand. We are currently considering how to customise our offerings to make more suitable rolling stock products that meet our clients' requirements."

During his presentation Yu referred to the current development of high-speed freight trains and new high-speed rolling stock. Many of these innovations may be on display at InnoTrans later this year where Yu promises CRRC will show a number of new products. CRRC will exhibit in Berlin as an integrated company for the first time and no doubt the company's representatives will again be enthusiastic to push its solutions to prospective European customers.

Yu's observations during his presentation in Berlin may well have rustled a few feathers among the European suppliers in the audience, particularly those that partnered with CSR and CNR in their early days of development. After all if CRRC is successful in fulfilling its strategy to crack the European market and to grow exports in all other regions around the world, these suppliers will suffer.

As Hitachi has already shown with success in the British market, the so-called Asian threat to European manufacturers' hegemony in their home region is now very real. CRRC, armed with affordable and technologically sound products, is hoping it will soon make a further dent.

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