Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Alstom's corporate logo is often appended with the nebulous motto "designing fluidity". Happily, though, the phrase is a perfect description for the French government's attitude towards state aid.

Paris is buying a bunch of high-speed TGV trains it doesn't immediately require so that Alstom won't downsize its Belfort factory in eastern France. Paying a manufacturer 450 million euros ($504 million) to build fast trains for low-speed lines -- whilst skipping an open tender -- is as judicious a use of taxpayer money as decreeing that croissants shall henceforth be free.

It's possible that finance minister Michel Sapin is right, and this isn't a de jure contravention of competition rules. But it looks like a breach of their spirit. The French have a peculiar obsession with keeping factories going, no matter how unnecessary, so Belfort was always likely to be thrown a lifeline with a presidential election approaching. By the time the European Commission gets round to ticking off Paris, the election will presumably have been decided.

France owns 20 percent of Alstom, so it knows better than most that it doesn't need a handout, even if this wasn't always the case. After the sale of its energy business to General Electric, Alstom had only 200 million euros in net debt at the end of March. Its backlog of orders is worth more than 30 billion euros - or about four times yearly sales. Revenue increased 7 percent last year and is projected to grow by about 5 percent a year until 2020.  Many European companies would kill for that in the current environment.

However, competition in Europe is tough and increasingly the bulk of Alstom's orders come from overseas. It's no doubt cheaper to build big things where they're being consumed, and often contracts demand it.

Going Global
The French state wants Alstom to keep jobs at home as it expands overseas
Source: Alstom annual report
nb financial years aren't directly comparable as two countries were reclassified from Europe region to Middle-East/Africa

This is where the problem arises for the French. The ruling Socialists have decided that the loss of local jobs is just too much to bear at a time when Marine Le Pen is peddling her populist message on globalization and its discontents. Of course, it's understandable that France doesn't want all Alstom's jobs migrating overseas, but we're a long way from that. More than two-thirds of its employees are still in Europe.

And there's a cost to all this. Artificial orders won't fix lagging competitiveness -- at Alstom or France. The company is expected to be profitable this year but its 5 percent adjusted Ebit margin is too low for comfort. With China's two largest train makers merging and on the hunt for orders, competition in trains is intensifying, so Alstom needs to up its game internationally.

France's intervention looks less like a case of designing fluidity, more "designing stupidity".

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Both figures are on organic basis.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net