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Global Economics

Stimulus Spending Boosts Japan's Train Manufacturers

As electronics and auto companies flounder, global stimulus spending may aid Japan's rail companies

With Japan's economy plunging at a faster rate than Europe or the U.S., thousands of jobs lost, and failing politicians lapsing from one crisis to the next, it's been a miserable few months for Japan Inc. Yet amid mounting grim headlines, one deal stands out. On Feb. 13 the British government signaled that a consortium led by Tokyo-based Hitachi (HIT) had won preferred bidder status for a $10 billion contract to build and maintain rolling stock for train lines running along Britain's east and west coasts.

For Hitachi, a sprawling conglomerate that makes everything from flat-panel TVs to nuclear plants, the British contract could not come at a more important time. Hitachi expects to lose $7 billion in the financial year that ends later this month, marking it as one of Japan's worst-performing large companies. This year, despite the huge loss for the group, railway-related sales at the company are forecast to jump a healthy 17%, to $1.5 billion. The British deal, if finalized in October, should see Hitachi and its partners John Laing and Barclays Private Equity supply up to 1,400 train cars. The consortium will also service the trains over a 20-year period.

Perhaps more important, analysts say the deal could be a sign that Hitachi and other Japanese companies can win more new business in the rail industry at a time when governments fighting the global recession are using stimulus spending to invest in infrastructure projects. Even as Japan's major export markets of autos and electronics slump, rail could provide a welcome growth opportunity. "This is very big news in Japan," says Hiroki Shibata, an analyst in Tokyo with Standard & Poor's (which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP)), referring to the Hitachi deal.

Battling Foreign Rivals

There should be plenty of opportunities to bid for more contracts. In the U.S., for example, the Obama Administration's $789 billion stimulus plan will provide an impetus for rail spending with $18.1 billion earmarked for transit and railways. In Europe, the European Union is contributing $630 million to member nations to spend on rail links as part of its stimulus efforts. And European national governments are increasing spending. Italy, for instance, is building a new freight line between Rome and Milan, while France is extending its renowned TGV high-speed rail services.

Faster-growing economies should provide further growth. China plans to increase the total distance of its rail network by 50%, to 75,000 miles, by 2020 at a cost of $700 billion. That spending will include eight high-speed lines, including the long-awaited route between Beijing and Shanghai. Among foreign players, Japan's Kawasaki Heavy is battling with Germany's Siemens (SI), Canada's Bombardier, and France's Alstom (ALSO.PA) to win business. And India's government is expected to go ahead with a bullet-train-style link between Mumbai and Delhi with Japanese companies, including Mitsubishi, likely to play a big role. As well as their know-how in high-speed rail (Japan's first bullet train opened for business in 1964), the Japanese government will extend India loans of $4.5 billion toward the project. "Japan is well positioned to take advantage of global infrastructure spending," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo.

Matsumoto adds that the beneficiaries of the rising global spending on rail will include train manufacturers such as Hitachi and Kawasaki Heavy, track makers, and construction companies experienced in building station facilities. Suppliers should also benefit. Graeme McDonald, an analyst at KBC Securities in Tokyo, says, for instance, that Nabtesco, which makes brakes and sliding doors for trains in Japan, plans to increase its market share in China and is aiming to establish a stronger foothold in Europe. "As the likes of Hitachi do more business overseas, the likelihood is that companies like Nabtesco will do more business with them," says McDonald. In China, Nabtesco has a 25% market share for brakes in the Chinese subway market, and hopes to raise that to more than 50% by 2014 by tapping increased local production. "China is a big plus factor for them," McDonald adds.

Eco-Friendly Technologies

In their favor, Japan's rail-related companies have plenty of know-how accumulated at home and overseas. For instance, Kawasaki Heavy supplied trains for Taiwan's bullet train service that opened in 2007. Environmentally friendly technologies may also give Japan Inc. an edge. In Britain, Hitachi's bid won praise because its trains, which are constructed from an aluminum shell, will be 17% lighter than the ones they replace even though they are longer. That helps them to be quieter, emit less carbon, and accelerate more quickly.

Still, competition will be intense with Siemens, Bombardier, and Alstom. Another problem is that stimulus spending today may take years to reach the bottom line. In the British project, if everything goes according to plan, Hitachi won't ink the deal before October. Even then, the first trains aren't expected to be delivered until 2013. Other deals may take even longer and require greater expense to secure. Taiwan conceived its bullet train system in 1980. Successive governments dithered over project details and then abruptly dumped French and German contractors for the Japanese team in 2000. To prosper in Europe, Japan's rail companies may need to introduce new designs that better meet local needs.

Then there's the politics of government spending. In the U.S. the lively debate over the "Buy American" clause in the Obama government's stimulus package, while ultimately watered down, shows the level of sensitivity about foreign firms benefiting from taxpayer dollars. In Europe, despite the British success for Hitachi, local rivals Alstom and Siemens are fierce competitors with long-established track records in the region. Hitachi, a relative newcomer, only began seriously seeking rail business outside Japan about a decade ago, a relatively short time in an industry where big contracts can take decades to fulfill. "If the customers are satisfied with Hitachi's [rail] cars, then Hitachi's reputation will grow, [but] it takes time," says S&P's Shibata.

Japanese firms in Asia may have to tread even more carefully. In Korea, which in 2004 became the second Asian country after Japan to introduce a high-speed rail service, the government insisted upon and won technology transfer rights as part of the project. That led to a train system based on France's TGV technology developed by Alstom, but meant that the government and private companies such as Hyundai Motor's unit Rotem are working on next-generation high-speed train systems of their own. They have ambitions to compete with Alstom, Siemens, and the Japanese for contracts in Asia, Latin America, and the Middle East.

In China, political relations can have big impact. In 2004, Chinese officials warned Tokyo that Japanese companies could be barred from working on a bullet train line between Shanghai and Beijing because of then-Japanese Prime Minister Junichiro Koizumi's visits to the controversial Yasukuni Shrine, which honors Japan's war dead, including World War II war criminals. For all that, according to reports in Japan, having won work on the Beijing-Tianjin high-speed railway, which is already in operation, Kawasaki Heavy is hopeful of picking up additional contracts for the bullet train line between Shanghai and Beijing.

Click to view a slide show of high-speed train projects around the world.

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