The evolution of the global business environment in the railway industry over the past few years has resulted in the realisation of multiple scenarios that may have previously seemed far-fetched. A few years ago, who would have thought that today, 45% of all ERTMS (European Rail Traffic Management System) trackside investments are placed outside of Europe, that Asian operators successfully operate rapid-transit systems beyond Asia such as the Hong Kong based MTR Corporation in Stockholm, Melbourne, London and various cities in mainland China, or the attempt of JR East to bid against German competitors for a contract operating an urban rapid transit system in Germany?
The development of the business environment has moulded the need for a standardised set of technical requirements and standards for rail products and applications. Global recognition of standard and technical specifications, such as the CENELEC safety standards and the Technical Specifications of Interoperability (TSIs), aim to make markets more accessible to manufacturers globally, while ensuring that systems perform safely without any compromise in technical operations. The first Chinese train manufacturers are in the process of having their products certified against the TSIs, in order to sell their products to Eastern Europe.
It has also been observed that in recent years, a wide adoption of the European standards has taken place. Japan, which has previously been a closed market to European manufacturers, has recently made its inaugural step by selecting a foreign manufacturer to supply CBTC (Communications-Based Train Control) technology for a metro line in Tokyo. Even local regulations in Europe, such as the German Federal Regulations on the Construction and Operation of Light Rail Transit Systems (BOStrab), have also been gradually garnering global interest and embracement.
Another prominent trend in the industry is the increasing scale and frequency of mergers and acquisitions. Through the acquisition of Ansaldo’s manufacturing capacity and business volume, Hitachi Rail closes in on its objective to reach scale/critical mass, as well as to place it in a better technological and innovative position. However, this strategy is often challenging and usually faces multiple complications. Acquisitions, in general, involve a high amount of risk, which may not guarantee high dividends, and usually involves intervention from local governments. An alternative of this strategy is the establishment of joint ventures.
In certain situations, global manufacturers are allowed to tender for projects in a country only if a joint venture is established with a local partner. The enforcement of partnerships by local governments allows localisation of firms and technology to take place. Localisation of international firms may also take place in the form of establishing local research centres, which allows organizations to develop solutions specifically suited to the needs of the regional market. Hitachi Rail, for example, has set up the Hitachi European Rail Research Centre and the Southeast Asia Centre for Signalling Systems in the UK and Singapore respectively to tap the railway demand and expertise in the regions.
While the participation of railway manufacturers are usually based on a combination of technical and financial considerations, the influence that international banks and foreign governments have on a railway project also play a significant role in the final selection of the tenderer, evident especially in emerging and developing markets. The foreign investments and loans allow the host country to establish costly infrastructure projects that reap benefits to the national economy and social welfare, while the sponsors are able to open up the local market for their country’s manufacturers. Japanese firms have benefited greatly from the ventures of JICA (Japan International Cooperation Agency), while Chinese firms are set for such enterprises as well, after their government’s proactive lobbying in regions such as Africa and Latin America.
With the changing dynamics within the rail business, it is clear that the type of market demand is set to evolve as well. Turnkey projects, for example, are gaining traction and are set to become a significant factor in the rail supply industry. It is forecasted that these projects, which combines at least two of the three key rail product segments (infrastructure, rolling stock, rail controls), shall grow to a market volume of approximately €12 billion per year by 2017.
Eventually technology improvements in the rail industry will gradually arrive at a plateau in the foreseeable future, but, the amalgamation of other factors, such as politics and international economics will increase the complexity of the business environment tremendously. This trend is not only relevant to new markets as the acquisition of Ansaldo by Hitachi Rail and the obvious attempts of Chinese conglomerates to enter the European market, has proven that traditional rail markets with a rich history of established technology and manufacturers, are also set for a change in business landscape.