A Bullet Train In The Making?

Railcar giant ADtranz is gaining ground in a tough market

When Kaare Vagner learned in mid-1995 that he had been named to run a railcar company merged from two archrivals, the former lieutenant commander in the Royal Danish Navy did what came naturally. He invited 12 executives from Germany's Daimler Benz and the Swiss-Swedish ABB Asea Brown Boveri Ltd., parents of the merged companies, to join him sailing the west coast of Sweden. For three days, they served as crew members and sang and drank together in the evening. By the end, says former ABB marketing executive Eberhard Beyer, "we knew how to work as a team."

That weekend set the tone for the joining of two sharply different corporate cultures. The new ABB Daimler-Benz Transportation, or ADtranz, was launched in January, 1996, as a 50-50 joint venture. Daimler's AEG, a German industrial group acquired in 1986, excelled in technology but suffered from high costs and wallowed in losses. The folks at ABB, under the stewardship of Percy Barnevik, were used to speedy decision-making. Vagner, a straight-talking, 10-year ABB veteran, had been named head of its money-losing railcar unit in 1992 and in one year had it back in the black.

It's too early to declare victory. But in its first year, ADtranz eked out an operating profit of $112 million on sales of $2.8 billion. Margins are still below 3%, but Chief Financial Officer Ruben Ornstein expects to double that by 1999 and to meet Daimler CEO Jurgen E. Schrempp's target of 12% return on capital employed by next year. "It's a tough business, but they're on the right track," says Jurgen Pieper, an analyst with DB Research in Frankfurt.

The merger created the world's largest railcar maker, overtaking rivals Siemens and GEC Alsthom. Besides building high-speed trains and locomotives, trams, subways, and people movers for airports, ADtranz also supplies control systems for railways.

CONTRACTS. Customers are taking note. Last year, ADtranz won a $156 million tender to build a subway line in Shanghai. It also bested seven European bidders for a $320 million contract to design, manufacture, and maintain 44 new trains over the next 12 years for Britain's privately owned LTS Rail Ltd. And Pakistan has just placed an order for a new lightweight electric locomotive called the Blue Tiger, developed jointly with GE Transportation in just 12 months.

But Vagner still has a tough job. As privatization has forced railways worldwide to focus on the bottom line and slash their spending, equipment prices have fallen 30% across the board. ADtranz' $2.6 billion in orders for 1996 were lower than expected. Yet the market is slated to grow by 6% to 8% annually over the next five years as demand surges in emerging markets.

ADtranz is tapping Daimler's research resources far more than AEG ever did. Vagner put Joachim Gaissert, a 22-year veteran of Mercedes-Benz, in charge of manufacturing and technology. One of his research teams is applying new suspension technology to intercity trains, so passengers get a smoother ride. Another team is adapting lightweight materials from the aerospace industry to make lighter trains that the weaker tracks in less developed markets can tolerate.

"SEXY." ADtranz is also tapping the auto experts at Mercedes for ways to reduce costs, largely by having suppliers make subassemblies. Gaissert aims for ADtranz' electric locomotive to have 100 pretested subsystems, instead of taking delivery of 1,200 different parts. He also wants to reduce the customized portions of each product to 10% to 20%, from the current 50% to 100%. Such steps could cut costs by 30%.

The 51-year-old Vagner, a former boxing champion in Denmark, draws on his early training as a blacksmith to communicate with workers on the shop floor. He began his nonmarine career in 1972, designing factories for the Danish sugar industry. He also helped manage a hearing-aid company and an electrical engineering outfit before ABB hired him in 1986 to run its Danish operations.

By yearend, Vagner will have a better idea of how well his strategy is working. That's when the public gets its first peek at five true ADtranz products, such as a new generation of the AEG people mover, spiced up with Italian design, and the prototype of a new light-rail vehicle. "Talk about sexy, I just fall in love with these big machines," he says. Now it's up to the customers to agree.

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