DESPITE a slowdown, the global railway market is still showing solid growth and is predicted to grow by 2.3% a year until 2020. This compares with a growth rate of 3.4% up to 2018 predicted in our last global study in 2014.
For the first time, after sales now accounts for 53% of the €169bn total market and has overtaken original equipment manufacturing (OEM) both in volume and growth. This is a direct consequence of the significant fleet and network expansion process that has taken place. Railway operators are increasingly under cost pressure which triggers the need for process optimisation through for example digital solutions and innovations in areas such as energy supply and consumption.
The rate of growth in the OEM market has slowed and is now at 1.3% a year up to 2020. This reflects the worldwide trend towards conservative investment strategies due to slow overall economic growth. Increasing political uncertainties in several regions are leading to the delay or cancellation of new investments. The market for rail freight products, which is directly linked to economic growth, is suffering particularly hard. In contrast, urban rail continues to stimulate long-term growth. China, the largest market, is following a similar pattern to other countries, as it reduces investment in conventional and high-speed rail but increasingly supports the development of urban rail systems. The high over capacity of Chinese manufacturers is leading to a strong focus on international markets and intensification of competition. Consolidation of the railway industry has already started and we believe it will even accelerate.
The after-sales market, which is currently worth €89bn, overtook the OEM market by €9bn in 2015 and is expected to continue growing strongly. The shift towards after sales is a worldwide trend that has been driven especially by Asia, the world’s largest railway market. After-sales should reach €104bn by 2020, averaging an annual growth rate of 3.2%. Meanwhile, OEM business will grow at a much lower annual rate of 1.3%.
We expect the high-speed sector to further decelerate in the next few years. As this market becomes saturated, it is hard to maintain high growth rates. This trend also follows the drop in railway investment in China which is contributing to a lower OEM growth rate. On the other hand, past high-speed expansion has also created demand for additional and more expensive maintenance. Many trains that entered service six or seven years ago are now reaching their overhaul cycle, thus increasing the demand for after sales. This trend is also seen in the infrastructure segment, which has developed alongside the rolling stock market and will lead to higher after sales volumes in the future.
The OEM and after sales rolling stock market has a combined market volume of more than €103bn and an average annual growth rate of around 2%. The strong link between the railway market and overall economic growth is reflected in the expected decreasing but solid growth rates in the OEM market. Following a period of continuously positive growth since 2010, the current outlook is less dynamic. The market for freight wagons and locomotives is particularly affected by this trend with a forecast annual growth rate of just of 1%. Urban rail still drives the market for rolling stock with a disproportionately high annual growth rate of just under 4%.
Increasing cost pressure for railways is leading to the need to improve value chains and results through the stronger use of digital and IT-solutions. These touch every aspect of the railway market. Their large-scale adoption is going to be decisive for the competitiveness of operators and manufacturers who need to focus on cost reduction to control and optimise life cycle costs.
Developing and implementing digital and IT-solutions require heavy investment by manufacturers in product development and by operators in product adoption. This demand contrasts with the expected slower growth of the railway market, which will limit total revenues and thereby the availability of funds.
The major changes already seen in the structure of the railway supply industry will accelerate further in the near future. China Railway Rolling Stock Corporation (CRRC) emerged as by far the largest rolling stockmanufacturer in the world following the merger of CNR and CSR in 2015. By focusing on building up local production sites in China to serve worldwide contracts, CRRC has created massive overcapacity. We therefore expect to see a rationalisation of production facilities in the coming years. This also holds true for the North American rolling stock market and in both cases the freight wagon sector will be particularly affected.
In Europe, Stadler Rail’s acquisition of Vossloh’s locomotive and light rail vehicle plant in Valencia has expanded both its portfolio and revenue, while Vossloh continues its strategy to focus on infrastructure.
Rolling stock component suppliers have been affected the most by the consolidation process. Companies such as Knorr-Bremse and Wabtec managed to grow organically and particularly by purchasing smaller suppliers. This has reduced the number of competitors in the market and single components are now produced by very few suppliers.
A new worldwide player in the infrastructure and system technology segment will emerge since Hitachi acquired major shares of Ansaldo STS. Furthermore, Alstom took over GE Signalling in 2015, which strengthens its position in North America and focuses Alstom on the railway market. These consolidations have resulted in fewer but bigger suppliers of infrastructure and system technology components.
This year we have included a new type of ranking: the top 10 railway equipment suppliers rather than limiting it to rolling stock manufacturers, which means the two most important component suppliers Knorr-Bremse and Wabtec are now included.
Africa and the Middle East is now the fastest growing market with a current volume of €7bn. In the next five years, it is expected to continue growing rapidly, at an average annual rate of 7%.
Growth is being driven by large projects underway, especially in the Middle East. Contracts for most of these projects have already been awarded, which limits the opportunity for new players to enter this market. Moreover, weak oil prices and lower demand for raw materials have threatened the budgetary equilibrium of many countries in the region, posing questions about their ability to implement projects as planned.
The large Western Europe market, which was worth €44bn in 2015, is expected to grow at 3.2% per year until 2020, which is above the worldwide average. Growth will be strongly influenced by the increasing investments in new rolling stock and important electrification projects, putting OEM slightly ahead of after sales, contrary to the worldwide trend. Despite the strain on national budgets, western European countries have managed to maintain a high level of railway investment.
Five countries are responsible for 50% of the total railway market in 2015: China, the United States, Russia, Germany and France. After sales volume averages 50%, but it varies widely, from only 30% in China to almost 70% in Germany.
In China, the after sales market is growing particularly fast and is gaining importance against OEM products due to the massive fleet expansion in recent years, with freight wagon, locomotive and passenger coach OEM sectors already facing serious challenges. The slowdown of the Chinese rail market follows the shrinking of the national investment plan from Yuan 3.58 trillion ($US 539bn) in 2011-2015 to Yuan 2.8 trillion in 2016-2020.
The US market is dominated by rail freight, which has recently become very challenging due to the abrupt end of the fracking boom and a decline in coal transport. Following a peak in orders for freight wagons and locomotives, investment in these segments has halted. In the short-term, this market is expected to decline still further, but it will recover by 2020. Growth is coming from passenger and urban transport as well as from the system technology sector, as new regulations require equipment of rolling stock with better safety systems.
Russia has been suffering the effects of economic sanctions and low oil prices, which have reduced economic activity, limiting growth of the transport markets and financing options for railways. Investment is now focused on important national infrastructure projects and more efficient rolling stock.
Germany, Europe’s largest market, is expected to continue growing at an above average rate because of important procurement projects and increasing investment in existing infrastructure. Private operators, which have been gaining considerable market share in rail freight and passenger transport, are having a positive impact on the market.
Conversely, the French railway market is growing less dynamically. A lack of public finance is leading to the postponement of essential investment in the conventional rail network as the focus is still on completing high-speed lines. Nevertheless, the expansion of urban rail networks and large modernisation projects in the greater area of Paris are having a positive impact.
From a global perspective, the large influence of globalisation, increasing rates of urbanisation and growing demand for freight transport have made way for increasing nationalism, political uncertainties and lower investment levels, resulting in a bleaker outlook for worldwide businesses. The economic embargo against Russia, the upcoming British exit from the European Union, uncertainty over the Turkish economy and China’s transition towards a market economy with a strong focus on exports, are just some of the factors that are putting pressure on the railway market. In some cases, priorities are being re-focussed on other national goals to stimulate demand.
*Tobias Blätgen and Leandro Giaretta Padovan also contributed to this article.
The Worldwide Market for Railway Industries study can be ordered from www.sci.de. Copies of this article will be available at InnoTrans on both the SCI stand (City Cube B, stand 103) and the IRJ stand (Hall 6.2, stand 101).