In January, Philippe Mellier, CEO of Alstom Transport, publicly accused Chinese companies of exporting trains made with technology obtained from foreign suppliers legally restricted to domestic sale. Mellier, whose company is best known as the manufacturer of high-speed TGV trains, called for a boycott of what is shaping up to be the Chinese equivalent.
The accusation was formally retracted by Alstom a month later, but the message is clear: foreign rolling stock companies face growing competition from Chinese train makers for international tenders.
Currently, Chinese CSR Nanjing Puzhen is bidding against Canadian firm Bombardier Transportation to supply the UK Department of Transport with 202 carriages. In 2007, CSR Ziyang and CSR Nanjing Puzhen sold three trains to Grand Central, a British rail service provider. In Saudi Arabia, China Railway Construction is part of a consortium that won a US$1.8 billion contract to build railway infrastructure. Alstom is still bidding to get in on the locomotive tender of this deal.
At first glance Alstom – which declined to be interviewed for this article – looks to be doing just fine. Third-quarter sales rose 11% year-on-year to US$5.93 billion and the company had an order backlog worth US$61 billion at the end of last year, according to Market Watch.
Foothold in China
Alstom sold its first locomotive to China in 1958 and, over the next 12 years, supplied 114 more. It has since expanded its portfolio, providing metro cars for the Shanghai and Beijing subway systems and locomotives to a string of projects across the country.
The company now has five joint ventures in China (the Alstom group as a whole has 11 here) that provide a variety of railway-related equipment, from signaling services to certain kinds of rolling stocks and railway vehicles.
Like most of its competitors, Alstom promotes a localization policy – and this is what lies at the heart of Mellier’s concerns. Foreign rail companies looking to operate in China have for years been obliged to enter via joint ventures with domestic firms. However, the technology transfer requirements attached to the joint venture agreements have become increasingly demanding, to the point that local players have got their hands on core technology. This puts them in a position to win contracts – perhaps at the expense of their foreign partners.
While domestic firms are only just branching out into the global market, the competitive situation at home is already intense, according to Dr Zhang Jianwei, China president for Bombardier, one of Alstom’s key rivals.
"Basically [local companies] have two big advantages: They are very competitive on price and their labor and materials costs are not so high; and they are competitive in terms of the delivery schedule. They are able to deliver products within one year or even several months," Zhang told CHINA ECONOMIC REVIEW in an interview late last year.
China is a big spender on infrastructure. For 2009 alone, the Ministry of Railways (MoR) allocated nearly US$90 billion to railway development. It wants to lay 110,000 kilometers of tracks within four years, of which 13,000 km will be for high-speed passenger trains. While opportunities remain for foreign contenders for Chinese train contracts, the nature of train procurement has changed. Flush with cash and options, the MoR is luxuriating in a buyer’s market.
"When doing business with a monopsonist [a single buyer] there is often little room for negotiating commercial terms," said Elliot Papageorgiou, a lawyer and executive at Rouse & Co, an international boutique law firm specializing in intellectual property rights (IPR). The best offer gets the deal and this leads to foreign competitors "cutting each other off at the knees."
As joint venture partners demand the transfer of more advanced technology, IPR lawyers devise new strategies intended to safeguard foreign companies’ trade secrets. They separate components of advanced technology among contractors and supply key data only to senior employees to limit the spread of information. Li Weishi, resident IPR counsel for O’Melveny and Meyers, advises ensuring confidentiality provisions signed by these employees are "as watertight as possible."
In theory, legal contracts can still stipulate what technology is going to be transferred through licenses, but practically speaking, imposing restrictions can be tricky. How does one, for example, stop Chinese companies from developing new technology independently? This is made no easier by the potential for political influence in the legal process should foreign companies seek to enforce contracts through the courts. In the current climate, legal action against pure trade secret theft or disclosure of confidential information is likely a lost cause, lawyers say.
Although technology transfers may ultimately be creating new competition, most foreign companies accept that sharing expertise is the price for access to the local market, and so they compromise.
Zhang believes Bombardier’s three full-scale manufacturing joint ventures – two for rolling stock and subway cars and one for propulsion systems – offer a competitive edge that may well see it benefit greatly from the infrastructure spending that is part of Beijing’s stimulus package. Meanwhile, on the technology transfer front, in January ThyssenKrupp agreed to sign over significant expertise for its Transrapid rail technology in order to win a deal with Shanghai Maglev Transportation to build a high speed line from Shanghai to Hangzhou.
Whatever the associated frustrations, it would appear that Alstom’s fortunes in China depend on its continued willingness to make concessions.