Newag and Pesa. Polish rail companies and the challenges of the global market

08.11.2018 | By Maciej Dulak

Trends are unrelenting. On the market of the rolling stock producers, Asian and American companies play a more and more important role at the expense of the European ones. The market itself consolidates to a more significant degree per the “law of the stronger”. Polish producers, who enter foreign markets more boldly than before, try to find themselves in this new reality.

Billions are at stake

Undoubtedly, the sector of rolling stock is one of the most strategically imporant segments for every major economy. The possibility of satisfying the needs among domestic carriers (generally, the state owns them) using local factories means killing two birds with one stone. First, citizens get to ride a better and more comfortable trains, which subsequently translates into higher support for the ruling party. Second, the production of rolling stock drives the development of domestic industries to the new levels, and builds long, often very complex, chain supplies that have a significant impact on the growth of the national economy (e.g. by creating thousands of new jobs in the subcontractor networks). It is not surprising then that majority of the world’s leading economies has their own railway champions. In the US it is General Electric, the CRRC in China, Siemens in Germany, Bombardier in Canada, Stadler in Switzerland, Hitachi in Japan and Alstom in France.

Globalisation and the technological development make changes in the rolling stock market – just as in other segments of the economy – inevitable. Compared to other sectors, e.g. automotive, they are probably not as dynamic, but they will soon lead to the lasting rearrangement of the whole market. And it is not all about the implementation of new technical or technological solutions, but also about the consolidation of the biggest players. And it is their modus operandi – e.g. creation of consortia to win public auctions, or creation of joint ventures with entities based on the developing markets – that is particularly important here. Hence, the most prominent players have diversified their presence in the markets, but also the products they offer.

After all, maintaining the position on the market is in the interest of not only the companies themselves but also in the benefit of the whole economies. And much is at stake. According to some statistics, the annual income in the segment of the producers of the rolling stock is 120 billion euro. In 2025, it may be 130 billion euro. In the companies producing the rolling stock (without subcontractors), 500 thousand people are employed.

Asian giants take control over the global market

In 2010, the twelve biggest rolling stock producers made 53% of all trains on the market. Five years later, their share on the market grew to 71%. In all likelihood, monopolisation of the market will advance further.

The main reason behind this trend is the rise of Asian companies. Subsided by their states, they look more boldly at the European market, but also at developing markets, especially Africa and Latin America. Between 2002 and 2010, export of the European producers of railway equipment grew by 219% to 8.6 billion euro, export of the Chinese producers increased by a staggering 597% to 3.3 billion euro and the Japanese companies made 182% more, that is 5.24 billion euro. Accessing the Asian market, in turn, is much harder for European producers. It is sufficient to say that in Japan, the share of external bidders is only 0,25%, and a total level of the market accessibility dropped from 68% to 63%. As a result, the share of Asian rolling stock producers in the global supply market is rising. According to Philippe Citroen, the director general of the UNIFE (Union des Industries Ferroviaires Europeennes), China, South Korea and Japan are the countries where European suppliers must face many serious hurdles, while European markets are wide open for the suppliers from outside Europe.

The year 2015 marked a significant breakthrough for the whole sector. Two Chinese companies – CNR and CSR – merged into the CRRC (China Railway Rolling Stock Corp.), forming a giant global company (twice the size of the two European leaders – Siemens and Alstom – joined together) with the highest share of the market and with the leadership in all but one (diesel locomotives) production segments (high-speed trains, metro and electric locomotives). The CRRC has an appetite for the European market, not to mention the opportunities in Africa, or Latin America. Between 2010 and 2015, the CRRC export rose over fivefold and now stands at 3.85 billion euro. The company is present on most of the markets as it builds metro trains for Chicago and Boston, provides South Africa, Pakistan and Cuba with diesel locomotives, Brazil and Argentina with electric multiple units and Australia with goods wagons. As is in case of representatives of other sectors of China’s business, a low price (20-25% lower compared with the competition), together with relative technological sophistication, is the crucial factor that enables Chinese to conquer subsequent markets.

Japan’s Hitachi (co-creator of Shinkansen trains) tried similar strategy when in 2015 it acquired Ansaldo Breda, an Italian rolling stock producer and Finmeccanica, a producer of the train control system, thereby creating Hitachi Rail Italy. In this way, Hitachi increased its bidding chances on the European market. It is also worth to mention Hyundai Rotem, a South Korean producer, which – after making metro wagons for Turkish and Greek markets – is now actively seeking an opportunity to build trams for Warsaw and declares its willingness to establish a factory in Poland.

According to data from 2017, three Asian companies were among ten largest global producers of the rolling stock (the CRRC in 1st place, the CRSC in 4th and Hitachi in 5th) and their share of income among all examined companies was as high as 50%. The representatives of Europe took 2nd place (Siemens&Alstom) and closed the top 10 (Stadler and Thales). North America took all the other sites with Bombardier, Caterpillar, General Electric and Wabtec.

A timid Europe’s response

In the wake of this deepening advantage, the European producers close ranks and consolidate their potential to face the challenge from Asian competitors. Last years, Alstom and Siemens, the two most significant representatives of the European market, declared their willingness for a merger. As a consequence, the second largest producer of the rolling stock (behind the CRRC) and the largest producer of the control-command and signalling system will appear on the global scene. For now, however, the European Commission is reluctant to grant permission for the merger and commenced infringement proceedings concerning a possible takeover of Alstom by Siemens. At the same time, the Commission questions the fears of companies with regards to the competitors from China.

Amid these feuds between global leaders and in the wake of the gradual consolidation of the market, small and medium producers – also the Polish ones – are left behind, and it is tough for them to compete with the international giants. In most cases, their operations focus on small orders. Although they are sufficient to make a living, they are not enough to save and allocate funds for development.

For example, in the CRRC, 3 billion euro annually is allocated for R&D. In Siemens, it is 1 billion euro. These amounts are beyond the reach of smaller producers, and nothing indicates that within the next few years the situation will change. Probably, they will even have to consider being swallowed by more prominent players on the market. That was the case of Vossloh’s (Germany), which in 2015 sold its tram and heavy diesel locomotives segment to Stadler (Switzerland).

They break down too rarely to make good money on them

According to many experts, there are simply too many rolling stock producers, the competition from the Chinese companies notwithstanding. 40% of production capacity of the companies located in Europe and the USA is not used. In Asia, this stands at 60%. It results mainly from poor liberalisation of the railway market – especially passenger trains – which are left in the hands of large national carriers or are part of the public transport. The situation, therefore, looks different than on the automotive market, where companies must court potential retail clients. Here, efforts to secure a new order mean cooperation, as political factors come into the picture, as well as local conditions do (e.g. necessity to open a new plant).

Another reason why the utilisation of production capacities stands at a relatively low level is – paradoxically – technological development and usage of the more complex information tools.

Basically, both all the new vehicles on the market and those a few years old, are easily available and non-defective (in other words, they rarely break down)

Obtaining ever higher operating parameters is the result of deploying sophisticated equipment that monitors exploitation level of particular devices and information about any abnormality. In practice, therefore, the level of vehicles exploitation is high, and they can perform transport duties for much longer than before. In effect, fewer rolling stock is needed, and the costs of service are lower. And for the producers, service was the most profitable part of the multiannual contracts.

The future: developing markets, climate and technology

Undoubtedly, the highest demand for rolling stock is in developing countries. According to available data, between 2021 and 2023, the global rolling stock market will grow 1.5%-2.7% annually. Of course, Africa (Middle East) and Latin America are the regions with the highest demand, where this growth is expected to be 5.2% and 4.8% respectively. In the NAFTA countries, it is expected to be 3.1% and in Europe – 2.2% – mainly due to the powerhouse economies of Germany, France, Great Britain, or Denmark.

These forecasts seem even more justified when we look at the sales structure of the biggest producers. For example, in 2016, Alstom sold 25% of its products in Africa and in the Middle East, 17% in Asia and 15% in North and Latin America. To be sure, new orders result from the need to develop the production capacities on the client’s market. In the case of Alstom, these markets are, e.g. Brazil, India, South Africa, the US, Algeria, or Kazakhstan. Also, Spain’s CAF – which recently bought Poland’s Solaris – has its plants outside of Spain: in the US, Brazil and Mexico. In 2017 alone, its products were sold to Seattle, Kansas and Auckland. Entering into local partnerships matters too, as it hugely increases the chances for subsequent orders. For example, in 2010, Siemens, together with Sinara Transport Machines, a Russian company, created Ural Locomotives.

Other important factors that increase demand for the rolling stock and at the same time define the direction for the whole sector are the urbanisation processes and progressive environment degradation. Therefore, the use of railway vehicles as a zero-emission transport with the potential to carry more passengers should be seen as the key opportunity.

The return to the exploitation of trams (France, the US) and underground – also autonomous lines – is a good example here. In 2015, inhabitants of 37 countries used autonomous metro lines (the total length of 800 kilometres). According to some forecasts, in 2025, this will grow to 2200 kilometres.

Poland’s bumpy start

Until 1989, the production of the rolling stock in Poland took place in four plants: Pafawag in Wroclaw, H. Cegielski in Poznan, Fablok in Chrzanow and Kontsal in Chorzow. In most cases, our industry was limited to the production of simple and not very innovative constructions (e.g. EN57, ET22), based on Western models from 1950s. For the most part, these were electric vehicles, while those powered by diesel were coming to Poland from abroad – the result of technological backwardness and political circumstances.

Economic transformation and the fall of heavy industry plants: ironworks, mines, or coke plants decreased the demand for railway services. Moreover, smaller producers that did not adapt to the new business environment entered into cooperation with road carriers, the move allowing for more flexibility and being less demanding with regards to the red tape burdens. Additionally, the crisis at the beginning of the 1990s strangled the process of development and changes in the existing rolling stock. As a consequence, many factories that produced locomotives, or electrical multiple units, were sold.

In 1996, Pafawag Wroclaw was sold to Adtranz (Germany), which in turn was taken over by Bombardier, a Canadian producer of rolling stock in 2001. Konstal Chorzow shared this fate when it was bought by Alstom. Meanwhile, after some efforts to modernise locomotives, build cranes and produce steel frames, Fablok Chorzow declared bankruptcy a few years ago.

The beginning of the 21st century brought us the first producers of the rolling stock that today are the most promising Polish companies in this sector. In 2001, ZNTK Bydgoszcz was transformed into Pojazdy Szynowe PESA Bydgoszcz, while in 2005, ZNTK Nowy Sacz became Newag.

Taking into consideration the above-mentioned market trends, hard times are coming for the Polish producers. Pesa has already experienced a sharp downturn, and its existence was called into question. If it was not for the Polish Development Fund, it might have collapsed or have been acquired by one of the competitors. Likewise, the financial results of the second of our producers – Newag – do not look impressive when compared with foreign companies. In 2017, the company had 186 million euro of income (ten times less than Stadler, 9th in the ranking and 140 times less than Chinese CRRC). A year before, Newag’s income was almost 128 million euro.

Lost opportunity for financial stability?

The weak standing of our producers is not only the result of bad management. I think that the problem also lies with the state and regional carriers who – after our annexation into the EU and obtaining large funds from subsidies – run an ill-considered policy with regards to the rolling stock.

After all, if, as I pointed out, the demand on the rolling stock market is very much dependent on public orders, it should be a priority for the state and municipal councils to conduct them in the way that maximises the production capabilities of Polish companies. I do not advocate adjusting a technical specification of the ordered vehicles to Newag or Pesa, but instead adapting the scale and quantity of the orders to the needs of our market. After all, it is no secret that a company benefits most when it makes one model of a given vehicle – the more it sells, the higher the markup it gets. It stems from the fact that every new order means new expenses on workload and on efforts to obtain another vehicle approvals.

But since 2004, most public auctions called by regional bodies included orders on only a few vehicles, despite the fact that they were of one type. For example, orders delivered by Newag – and its Impuls was used in most regions in Poland – generally amounted to no more than 10 vehicles. The situation – although on a smaller scale – was similar to Elf, Pesa’s train, which was also delivered in quantities not exceeding a few vehicles. Meanwhile, in the West, or in Scandinavia, not to mention developing markets, similar orders on Electric Multiple Units (EMU – the same as Impuls of Elf), generally exceed 50-100 vehicles and such contracts are worth billions euro. It is not clear to me why particular regional carriers did not form consortia to more effectively bid for contracts and thus save money. For producers, in turn, such a set-up would allow for a higher markup.

A huge culmination of orders from domestic carriers was another essential problem. Benefiting from the European funds, they called many time-limited public auctions, overestimating manufacturing capacity of our producers (that was the reason for financial troubles of Pesa, which could not deliver the orders on time and had to pay contractual penalties). On the contrary, when the money from the EU did not flow, it was hard for Polish producers to maintain high employment.

No wonder then that Polish producers did not get the opportunity to spread their wings on the outside markets, not to mention the possibility of production abroad, or creation of consortia with representatives of the foreign entities.

Throughout its time on the market, Newag has sent four diesel multiple units Vulcano to Ferrovia Circumetnea (a new deal was signed in December 2017) and signed a contract to deliver five electric multiple units Impuls 2 to Ferrovie del Sud Est, also an Italian carrier. On two occasions – production of metro wagons for Warsaw and Sofia – the producer from Nowy Sacz cooperated with Siemens, the move that should be praised (transfer of knowledge, additional income). Meanwhile, Pesa has exported its vehicle to Belarus, Bulgaria, Czech Republic, Kazakhstan, Lithuania, Ukraine, Romania, Russia, Hungary, Italy and Germany. In the latter case, the order worth 1.2 billion euro was from Deutsche Bahn. It turned out, however, to be a considerable challenge due to approval procedures, which last up to 3 years. Earlier, the company was hit by Russia’s actions which – due to the embargo and the meltdown of the rouble – delayed commissioning of trams built for Moscow.

From the perspective of Polish industry, it can be said that massive subsidies for the new rolling stock have not been used properly. Both Newag and Pesa were not able to make its presence visible outside of Poland, especially in developing markets where the rolling stock is most needed. Moreover, both producers are still largely dependent on the domestic market, where the rolling stock is acquired with the help of the European subsidies.

What’s next?

Despite all the above-mentioned negative factors, it should be clear that Polish companies succeeded and showed that not all industries in Poland have to be dominated by foreign capital.

By creating a highly regarded Impuls family, the producer from Nowy Sacz showed that in a very short period, it is capable of providing reliable electric multiple units of high quality. By moving on to the foreign markets and obtaining a vehicle approval in Germany, Bydgoszcz-based Pesa acquired new opportunities that may result in new contracts. It is regrettable that – at some stage – Pesa’s path did not go the right way and it did not acquire – together with Newag and potential state aid – Czech Republic’s Skoda with its plants in Hungary, Russia, or Finland. The cost of such a takeover would be approximately 1.65 billion zlotys.

What comes next? It is a topic for another story, the one that will touch upon the future of Polish state (PKP IC) and regional carriers. The example of Solaris shows that at a certain level, the cooperation with a foreign entity experienced in production for the overseas markets is necessary.

Translation from Polish: Łukasz Gadzała

 

This publication has been cofinanced by the Ministry of Foreign Affairs of the Republic of Poland within “Cooperation in Public Diplomacy 2018” programme.
This publication reflects the views of the author and not the official stance of the Ministry of Foreign Affairs of the Republic of Poland.

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