Challenges down the tracks from planned Siemens-Bombardier merger
Germany's Siemens and Canada's Bombardier are reportedly considering merging their train units to shore up against China's competition, according to media reports.
This is not the first time that the two companies, with their train units boasting a joint revenue of about 15 billion euros ($17.5 billion), have considered such a move, which will allow them to forge a stronger counterweight to the Chinese State-run company CRRC.
CRRC's annual sales revenue stood at about 32 billion euros and the company is already successfully marketing its railway technology to developing countries across Southeast Asia and the Middle East, according to German news site Handelsblatt Global.
For CRRC, though, the question is not whether competition will increase, but how the increased competition will affect its bottom line.
Bombardier is currently undergoing a difficult restructuring process. And some believe the merger with Siemens will beef up the two's strengths when Europe permits Chinese companies to sell railway products. So from a regional market perspective, such a merger could pose some hurdles for CRRC to expand its dominance into the European market.
But looking at the global market, CRRC's advance might prove hard to stop.
In Africa, the operation of two new railway lines is the latest testimony to the retreating Europeans.
The Chinese-funded Mombasa-Nairobi Standard Gauge Railway in Kenya pretty much replaced the meter-gage railway previously built by the British. And the Addis Ababa-Djibouti Railway linking Ethiopia and Djibouti is a replacement of a century old railway built by the French.
While it can be said that the proposed merger will shore up defenses on Europe's home front against its Chinese rival, the merger might not live up to the Western companies' global ambitions.
In terms of high-speed rolling stock, CRRC has 70 percent of global market share. Japanese firms hold another 10 percent, while France's Alstom SA owns 7 percent, according to media reports. Siemens' global market share is only at 3 percent.
The political backing enjoyed by the Chinese train maker, the experience gained from running on the world's largest high-speed railway network and the edge in cost performance all form a combined comprehensive advantage over European rivals. Japanese firms remain the most viable challenger to CRRC.
However, there is ripple effect to be aware of. The addition of one more viable competitor on the global stage will cast extra weight in the bidding process for global projects.
Suppose a future buyer successfully pushes down for example the interest rate of loans provided by the Chinese, because there are more parties vying for the bid.
This challenge should not be underestimated. This will squeeze the Chinese bidder's profit margins, and is likely to undermine the quality and progress of the projects.
Some of the ongoing overseas projects already have a very low profit margin. This is why the side effects of the planned Siemens-Bombardier merger should be given attention.
