WABTEC’s $US 1.7bn acquisition of Faiveley, which was confirmed in November 2016, shook the railway equipment supply industry. Two giants of the sector - Wabtec traces its history back to the founding of Westinghouse Air Brake company in 1859, and Faiveley to 1919 - had combined into a vast conglomerate with annual revenues of around $US 4bn and activities at more than 100 manufacturing sites in more than 30 countries.
Inevitably such major mergers place strain on both parties. And Mr Raymond Betler, Wabtec CEO, says it has been no different in this case. In particular he says there have been cultural challenges given that Wabtec and Faiveley are not simply American and French companies, but multinational players. However, he emphasises that both sides have worked prudently and professionally to deliver the changes required to integrate both offerings, and heading into 2018, he is pleased with the results so far.
“This has been very much a side-by-side reorganisation,” Betler says. “We began with 11 organisations at the start, but by the middle of 2017 this had been reduced to seven. This was a big step in the integration. We carried out internal benchmarking of all processes to identify best practice based on each other’s experience. From maintenance, engineering, product development, and supply, the best products in each individual business unit have been identified and we have one person in charge of each unit to implement this process. This has resulted in some product redundancy but it is helping us to go to market with the best possible offer.”
Betler says that the approach is already benefitting the company. In Australia, where Wabtec secured a major order in 2017 to supply components for commuter trains in Melbourne, the incumbent had a strong presence in the freight and electronics sector which is complemented by Faiveley’s strong position in transit, a market that Betler says Wabtec has tried but failed to enter.
In Britain, Wabtec’s strongest international market where the company employs 2500 people and has long-established relationships with rolling stock operating companies, a three-year integration procedure is in place led by legacy Wabtec employees. Similarly, in Italy, where Wabtec owns some niche braking system suppliers, these have been integrated into Faiveley’s larger brake business, which is strong in the Italian market.
“It is helping us to have a more complete offering in every business unit,” Betler says. “Instead of one company having 200 solutions, and another having 100, we now have 300 under one single country manager. We are then able to go to the customer with a complete product portfolio.”
As for the current condition of the market for this portfolio, Betler reports a mixed outlook for 2018.
The Faiveley acquisition expanded Wabtec’s market share to 25% in Europe and Asia, markets where Betler says Wabtec had a presence, but with Faiveley onboard, it now has a much stronger foothold. In its domestic market, the United States, Wabtec holds more than 60%. However, while transit has been performing well, the company is still feeling the effects of a slump in US freight traffic.
“For the past three years we have been waiting for a recovery,” Betler says. “The good news is that traffic is increasing. However, the recovery is not robust. One week we might get an increase of 5-6% and that will be followed by 1-1.5% the following week. We have a long tradition in the after-market sales business and the condition of this market is very much a result of traffic levels. It has been slow but in the second quarter we began to see changes.”
Betler adds that brake shoes and friction products are also emerging as a revenue generator. However, the US freight vehicle market continues to decline. From 80,000 new wagons in 2015, there were 60,000 ordered in 2016, and 40,000 last year. And while the expectation was that it would fall further to 20,000 in 2018, Betler says he expects this to remain flat at 40,000. “It is not going to dip again,” he says.
The US market for new locomotives is similarly struggling and Betler says there is hope it will rebound in 2019, and in the worst case, 2020. Wabtec supplies locomotives through its MotivePower division and provides components and systems for GE, EMD, and Progress Rail.
However, the “mixed bag” US market is reflected in the excellent prospects for Positive Train Control (PTC) deployment ahead the federal deadline for compliance on December 31 2018.
Wabtec is a supplier and integrator of wayside and onboard PTC equipment and is working on projects across the country. With commuter railways still placing contracts for the technology, Betler says that collectively they now have no chance of meeting the federal deadline. The Class 1s, however, he says, are in a good position.
“They have made a lot of investments over the past six or seven years and they clearly see the benefits that collision avoidance will bring as well as potential improvements to operational efficiency,” Betler says.
“I do think there is capacity in the market to complete this. The Class 1s have quietly hired and trained thousands of engineers with this in mind. Some of our people, who have been embedded in their organisations, have witnessed this first hand. The two biggest Class 1s are at 85% and 75% completion already, and have been very diligent about it. They have processed, programmed and maintained it, and have a working policy to complete it on time.”
Market growth
Wabtec’s acquisition of Faiveley was consistent with the company’s policy of strategic acquisition, which Betler says forms one element of a four-prong approach to market growth. This also includes growing the company’s international experience, new product development and innovation, and an emphasis on after-market and service expertise.
Since embarking on this strategy when Mr Al Neupayer joined the company as president and CEO in 2006 - Betler joined in 2008, becoming president and CEO in 2014 - Wabtec’s revenues and Ebit have increased four-fold from $US 1bn and $US 120m respectively. During this period, the company has been involved in around 50 strategic acquisitions, with Betler reporting that 95% of these have gone well.
“There have been a few disasters but these are by far in the minority,” he says. “These are usually the very small ones where we take a risk because of the technology. Our criteria for acquisitions isn’t necessarily how successful the company is, but if it is a strategic fit with our existing offer.”
He adds that the ideas for acquisitions generally “come from the bottom up” with experts in the field encouraged to offer input on how they feel the company can continue to grow and develop. Yet Betler emphasises that with a large focus on research and development throughout its operations, there is a preference for innovation to occur in-house, which he says is a far more efficient return on investment.
Inevitably much of this recent innovation is focused on harnessing digital and internet-connected technologies. Betler says the company is working with clients on delivering the opportunities afforded by digitalisation - whether this is by utilising the data generated by the 22,500 PTC-compliant locomotives by introducing a central diagnostics system, or other internet-connected devices which can provide asset condition information. For example, in October 2015 Wabtec acquired Track IQ in Australia, a manufacturer of wayside sensor products, which has developed a sensor that is embedded in the track bed and can detect all manner of conditions when a train passes over that particular track section.
Betler says that the development of automated technologies all points to the gradual deployment of automated and driverless operation on main lines. With these technologies available for the past 40 years in the transit sector, he says that human issues rather than technological barriers are preventing a wider rollout. Yet as automation becomes commonplace in other sectors - particularly the road freight industry in the United States - he says rail must continue to innovate to become more efficient and to remain competitive.
Betler says there is a general willingness to embrace new technologies despite rail’s reputation as a conservative industry. He says this is particularly apparent in the North American freight sector, which is less bogged-down in bureaucratic issues than their transit counterparts. Indeed, he says that rail has made great strides in the last 10 years, and he expects this continue. “There is an opportunity in the next 10 years to eliminate wayside signalling infrastructure,” he says.
Of course, Wabtec is not the only manufacturer engaged in market consolidation in recent years, and Betler’s own career emphasises this point. He joined Westinghouse as a design engineer rising to CEO during a 30-year career as the company evolved into AEG Transportation, ABB Daimler-Benz Transportation (ADTranz), and finally Bombardier.
As a result, he says recent consolidation in the rolling stock manufacturing market is nothing new, and is in fact healthy for the industry. “30 years ago, there were 500 car builders in the market,” Betler says. “Every country had their own. Now there are around 100 but there is still over capacity in the rolling stock supply market. It is therefore natural to see the consolidation that is happening, and ultimately it is better for the customer.”
While the recent announcement of a merger of Alstom and Siemens, and the upcoming sale of GE’s Transportation division made major headlines in the second half of 2017, Betler says the market is still responding to the merger of China’s two rolling stock manufacturers - CSR and CNR - into CRRC in 2015. The Chinese supplier is increasingly eyeing projects in Europe, and has already secured contracts in North America, where Wabtec is working as a sub-supplier. Chinese sub-suppliers are also making their presence known in the market.
“We are not naïve,” Betler says. “We know we are competing with Chinese sub-suppliers in China and in other places around the world. But we have belief in the market because there are a lot of ways to compete other than on cost.”
This includes by remaining an innovative supplier. With the Faiveley integration progressing well, and with manufacturing and supply facilities located around the world, Betler says Wabtec is well-placed to compete. And as it heads into 2018, he is optimistic that the company’s upward trajectory will continue.
“We believe we have the innovative, creative, and low-energy solutions that our customers are demanding available in our portfolio,” Betler says.
