China's Great Rail Spree Continues

Beijing, which is spending $190 billion on a railroad build-out through 2010, is looking to make more deals with the likes of Kawasaki and Alstom

When it comes to big, splashy railway projects, China has grabbed plenty of international attention for next-generation systems such as the Shanghai Maglev train that opened in 2004 and that reaches speeds of 267 mph (430 km/h). Last year's opening of the high-altitude Qinghai-Tibet Railway and the start in January of China Railway high-speed service between Shanghai, Nanjing, and Hangzhou have also drawn attention from global rail buffs.

Yet such high-profile projects barely give you a glimpse of the massive build-out ahead for China's national rail lines. Some 17,000 km (10,655 miles) of new passenger and freight rail networks are expected to be added by the end of the decade. China's 11th Five-Year Plan, which ends in 2010, calls for spending $190 billion on rail infrastructure. And this will go down as the "biggest (infrastructure investment) in China's history," Li Guoyong, transportation director of the National Development and Reform Commission, announced last November.

All of this, of course, has international global rail equipment firms scrambling to catch the Beijing mega-buck express. Canada's aerospace and transport giant Bombardier, trading company Mitsui (MITSY) and Kawasaki Heavy Industries (KWHIY) of Japan, as well as European players such as Germany's Siemens (SI) and Alstom of France, are all in the chase.

Lack of Trains Slows Growth

"We see today unprecedented levels of activity," says Simon Charlesworth, vice-president of business development with Alstom Transport. Across much of the region, "…there needs to be massive investment," he said at the Asia-Pacific Rail 2007 Conference in Hong Kong that kicked off Mar. 20.

China has by far the biggest needs in the region. And as crazy as this may seem, its economy would probably be growing at even a faster rate than the current 10%-plus a year pace if its rail infrastructure were truly up to snuff. Though improvements have been made in recent years, its nationwide passenger rail network, with some 2.4 million seats-worth of capacity, is far short of the 3.4 million in daily demand. Smaller cities in the western part of the country have to get by without rail service.

Particularly problematic right now is the shortage of freight trains and lines to carry raw materials from the western provinces to manufacturing centers along China's more prosperous coastal strip, says Huang Min, chief economist with China's Railways Ministry. "Our railroad service can only satisfy 35% of cargo demand," he said.

On Track for IPOs

For instance, China currently has great difficulty getting coal mined in areas such as Shanxi Province and western Inner Mongolia to power utilities in the east. (China relies on coal for about two-thirds of its electricity needs.) A big chunk has to be shipped by truck, which is expensive and adds to the mainland's already sizable pollution problems. To correct that, China must spend big and open up its rail sector even more to foreign investment, some argue.

China will rely on bond financing for its rail needs, but some state-owned rail companies are expected to raise money in the Chinese equity markets. Take Daqin Railway, which operates China's biggest coal hauling line. It raised nearly $2 billion in an initial public offering last summer, and its share price shot up 29% during its first day of trading due to investors' consciousness of China's ravenous power needs. Investors have bid up the railway operator's shares by some 70% so far in 2007 trading in the Shanghai stock market.

Meanwhile, there have been some big contract wins by foreigners on the mainland in recent years and there are probably more to come. Siemens played a big role in the Maglev project in Shanghai, in late 2004 it bagged a contract from the government build 180 double locomotives, valued at roughly $487 million.

Looking to Share Technology

Last month, Canada's Bombardier signed a $1.4 billion deal (its share is $480 million) with China's Dalian Locomotives and Rolling Stock to produce 500 electric freight locomotives. And on Mar. 12, Alstom signed two contracts worth more than $465 million with the Railways Ministry to build electric freight locomotives and to electrify high speed lines on the mainland.

However, with its vast build-out of national rail networks, China also has extraordinary leverage to extract technology-sharing concessions. In exchange for lucrative contracts, companies such as Japan's Kawasaki, and Bombardier and Alstom, have agreed to help Chinese rail equipment companies improve their manufacturing know-how.

Chinese companies and the government are working on a domestically designed (the government owns the intellectual property rights), next-generation railway locomotive. And the story is pretty much the same in other Asian rail markets such as South Korea, particularly when it comes to high-speed rail networks (see, 1/10/07, "Yellow Light for High-Speed Train Deals in Asia").

For the moment at least there still seem to be big opportunities for foreign rail equipment makers in China. Beijing is thinking—and spending—big.