Rail Transplant

getty-177881518-614x460The BF Blog has been keeping you updated on several ongoing trends in recent months. We’ve told you about the urgent need to rebuild America’s crumbling infrastructure, including our dangerously dilapidated rail system; we’ve tracked the resurgence of U.S. manufacturing; and we’ve highlighted the phenomenon of insourcing—companies which outsourced their manufacturing to China moving this production back to the U.S.

We’ve been assuming these trends would have a predictable trajectory, with the common thread being a strengthened U.S. manufacturing sector. For example, it seemed a safe bet that when [let’s hope it’s not if] America gets serious about rebuilding its infrastructure, the effort would provide a huge lift for North American companies who have long specialized in producing the components of our transportation system.

But a recent development in the transportation sector in Massachusetts has us rethinking some of our assumptions.

When the Massachusetts Bay Transportation Authority [MTBA] decided to replace 284 aging subway cars on Boston’s Orange and Red lines, Bombardier of Canada—the leading North American manufacturer of state-of-the-art subway cars for decades—was presumed to be the frontrunner to win the big-ticket project. The Canadian company, which entered a $1-billion bid, was competing with two huge manufacturing conglomerates based in South Korea and Japan [Hyundai and Kawasaki] and two rail manufacturers from China.

But the winning bid—at $566 million nearly half the price of Bombardier’s offer—came from one of the Chinese manufacturers, China North Locomotive and Rolling Stock Industry Corp. [known as C.N.R.].

We know what you’re thinking–that this represents a resumption of large-scale outsourcing, with a Chinese company deploying cheap labor and huge government subsidies to bring another manufacturing plum to the PRC. Not so. According to a report in The New York Times, there were two factors that tipped the scale in favor of C.N.R., and both are eyebrow-raisers.

First and foremost, C.N.R. agreed to assemble the rail cars on a 40-acre industrial lot in a former Westinghouse manufacturing center in Springfield, MA. Ground recently was broken for the $60-million facility, which will employ 150 workers and begin operations next year. The plant is expected to begin delivering new subway cars to Boston in 2016; the company promises these rail cars will earn a Made in U.S.A. label by containing at least 60 percent U.S.-made components.

C.N.R.’s other advantage came from the undisputed fact that China is now the global leader in the development of advanced rail systems and the components needed to make them run. That’s right, China can build advanced transportation systems much better than we can. The PRC has installed more than 7,500 miles of high-speed rail lines, the most in the world and four times more than second-place Japan.

Both of these factors should serve as a wake-up call alerting us to a major shift in the economic competition between the U.S. and China. It’s no longer about China using a huge low-cost labor pool [and government subsidies to state-owned enterprises] to grab our manufacturing jobs. The PRC now is exporting its technology and expertise, and it’s setting up manufacturing entities in other countries. In doing so, the world’s most populous nation has laid down a marker that it’s ready to go after a much bigger prize—domination of leading industrial sectors at all levels.

Unfortunately, China’s move into the major leagues of industrial competition doesn’t mean the PRC has decided to play by our rules.

In 2000, China split its state-run locomotive manufacturing entity into two competing companies, C.N.R. in the northern half of the country and C.S.R. in the south. Both companies bid on the Boston subway car project, which may have given the MBTA the impression that it wasn’t dealing with a huge state-run entity which might use nefarious means to undercut competing bids.

But on June 1—after the Boston project was awarded to C.N.R.—China announced that C.N.R. and C.S.R. are being merged to create the China Railway Rolling Stock Corporation [CRRC], a behemoth employing more than 176,000 people. The reunited entity, which will be headquartered in Beijing, now has an effective monopoly on more than 80 percent of the rail freight industry in China.

So after watching what seemed like an upstart [C.N.R.] become the first Chinese company to win a major transit contract in the U.S., North American rail industry manufacturers now find themselves competing with China Inc.’s rail equivalent of Boeing.

Not that we’re suggesting this was China’s plan all along. But we’ll let you know if CRRC chooses a Trojan Horse for their new logo.