With US factory and Boston transit deal, inroad for Chinese rail firm

People look at booth of CRRC during UrTran 2015 on June 16, 2015 in Beijing, China.
ChinaFotoPress | ChinaFotoPress | Getty Images
People look at booth of CRRC during UrTran 2015 on June 16, 2015 in Beijing, China.

China's biggest rail manufacturing company is setting its sights on the United States, breaking ground on Thursday for a $60 million plant in Springfield, Mass., that will assemble new cars for Boston's subway system.

The company, the China Railway Rolling Stock Corporation, or CRRC, is the first Chinese rail car manufacturer to win a major transit contract in the United States.

The Springfield plant, which will hire 150 people, is part of a $566 million contract that the state-owned Chinese company won last year to provide 284 cars for the Boston transit system's Orange and Red Lines.

The company sees the plant as a potential beachhead to win more contracts in the United States, and the deal represents China's biggest push in the American railroad market. It is part of the Chinese government's policy to encourage its technology and infrastructure companies to export their skills and seek foreign markets.

The bid, which beat out established competitors like Bombardier of Canada, received the backing of the local authorities because it includes a provision to assemble the rail cars in Massachusetts on a 40-acre industrial lot in a former Westinghouse manufacturing center. The new plant will begin its operations in 2016 and the first cars are to be delivered in 2018. They will replace Massachusetts Bay Transportation Authority's Orange Line cars that have been in service for 32 years and Red Line cars that have been operating for 44 years.

The presence of a new rail car manufacturer in the United States may provide an impetus for cities and states that are considering modernization of their transit systems or are looking into high-speed rail.

Yu Weiping, CRRC's vice president for international business, said his company was eager to apply in the United States the lessons learned building transit systems and high-speed systems in China.

In his previous job, as chairman of Tangshan Railway Vehicle, which is owned by CRRC, Mr. Yu oversaw the design and manufacture of one of the fastest high-speed trains in the world, with an average speed of 218 miles an hour.

"With our expertise in this field, we would like to partner with whichever states see the need and continue to be a good partner and help create local jobs," Mr. Yu said, speaking through a translator.

CRRC was formed on June 1 from the merger of the China North Locomotive and Rolling Stock Industry Corporation and the China South Locomotive and Rolling Stock Corporation. The merger created controversy in China because the combined company supplied 80 percent of all freight cars and passenger cars in the country.

The companies — known as C.N.R. and C.S.R. — were split apart by the government in 2000 to foster competition in the Chinese rail market. The strategy succeeded, but the authorities eventually realized that the two state-owned rivals undermined each other by bidding against each other.

The re-creation of a near monopoly was seen in China as a retreat from the country's goal of encouraging competition and giving a greater role to the market, reinforcing perceptions that the merger represented an expansion of state control over the economy. The combined company, with headquarters in Beijing, employs 176,000 people.

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"The Chinese government found out that they were competing against one another, and all this did was to drive down their profit margin," said Jim Blaze, an independent rail economist. "The government said enough of this nonsense. You are government enterprise, and we want you to be successful at the price level."

C.N.R. won the initial Boston contract by offering the lowest price among five competitors. Its bid was a little more than half of Bombardier's $1 billion bid. The other bidders were Hyundai Rotem of South Korea; Kawasaki Rail Car of Japan; and C.S.R.

"This might have been a price-loss leader to establish themselves in the business," Mr. Blaze said. "They can afford to do that, because they are a government-owned structure. But will they get a lot of market share? That's hard to say."

C.S.R.'s bid was disqualified by the Massachusetts Department of Transportation, rejected in three categories: technology, manufacturing and quality assurances.

Rail is one of China's most strategic assets. The country has built more than 7,500 miles of high-speed rail tracks in recent years, four times as much as Japan, which has the world's second-biggest rail network, according to the World Bank.

In 2013, China's high-speed rail lines accrued more passenger-kilometers than the rest of the world combined — about four times the volume in France and two and a half times that of Japan. It plans to connect all its cities of more than 500,000 people through fast rail this year.

But while the China Railway Rolling Stock Corporation is involved in China's biggest rail projects and has built the country's fastest trains, its ambitions in the United States may be more modest for now, Mr. Blaze said.

The transit market is highly fragmented, and transportation authorities are often beholden to the design specifications of their traditional suppliers, which makes it harder for new entrants to compete, he said.

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Also, moving from transit systems to high-speed systems might be especially tough, particularly for a state-owned company, given the political opposition to rail investments in Congress. Although President Obama has made high-speed rail a priority, Congress has not provided sufficient funding for the president's plans, while several states, including Florida, have balked at the high costs and canceled high-speed projects.

Amtrak's Northeast Corridor line remains the only high-speed system in the United States. Still, trains on that stretch, between Boston and Washington, lag painfully behind other high-speed networks across Europe, Japan and China.

"As you know, about 100 years ago, the U.S. infrastructure was leading the way, but after 100 years, it still has a lot of room to grow and create opportunities," Mr. Yu said.

CRRC promises to build 60 percent of the value of its train cars in the United States, to earn the "Made in U.S.A." label.

Still, Mr. Blaze estimated that some of the most significant aspects, including the design, engineering, steel work and some manufacturing — would still come from China.