On January 5, the Financial Times* reported that China was considering merging its two large state-owned rail manufacturing companies: the China North Locomotive and Rolling Stock Corp (CNR) and the China South Locomotive and Rolling Stock Corp (CSR). The combined company would control more than 90 percent of the Chinese rail equipment market. For this reason, some Chinese government agencies oppose such a move, wanting to maintain a degree of competition.

[*For full access to Financial Times articles linked in this blog post, a subscription is required.]

A merged company would be the largest in this industry worldwide. And supporters feel that a merged company would be a formidable force for capturing export orders—of crucial importance for the years after China’s current investment spree peaks in 2013.

This all comes against the backdrop of a remarkable development. China’s high-speed rail manufacturing industry has emerged in the span of just a few years. China has linked its domestic transportation goals—transforming its once outdated and overburdened rail sector into a strong competitor against environmentally less-benign modes of transportation—to a strong manufacturing policy that included tough deals with foreign rail manufacturers.

In 2007, China set a goal of building about 12,000 kilometers of high-speed lines by 2020, subsequently revised to an even-more ambitious 25,750 kilometers—equivalent to about two-thirds the length of the Equator. China’s massive rail investment program has been mostly debt-financed.  The Financial Times reports that “the proportion of railway construction funded by debt has increased from under 50 percent in 2005 to more than 70 percent” in 2009.

The early high-speed trains were produced by foreign companies and exported to China. But this changed rapidly with the help of stiff local-content requirements that stipulate that 70–90 percent of rail equipment be manufactured domestically. China has deftly used its lucrative market as a lure for foreign manufacturers, striking technology-transfer agreements with companies like Bombardier, Alstom, and Siemens that permitted Chinese manufacturers to reproduce technologies and rail vehicle designs in local factories, and soon thereafter emerge as low-cost competitors.

The Financial Times speculates that foreign companies may have transferred more of their rail technology than they admit publicly, in a strategy to curry favor with China over their competitors but which ultimately benefited Chinese companies.

French and Japanese rail industry executives have criticized China, accusing it of forced technology transfer and even technology theft, while others, such as Siemens of Germany, have been reluctant to complain or insist they are comfortable with China’s policies.

Leading Global Rail Equipment Manufacturers

CNR and CSR have grown into formidable global competitors—selling light rail, commuter, and subway vehicles to a broad range of countries, and increasingly bidding for high-speed projects. (See Figure above.) Although Chinese companies still lag behind world leaders technologically, they are able to compete internationally on price, and the national government plays a key role in providing low-cost financing to help these companies scale up.

China’s rise in rail manufacturing is far from an exception. In industry after industry, the country has risen to the top of the global ranks in a remarkably short amount of time, via similar strategies that also entail generous domestic subsidies. This approach has led to a growing trade row over the promotion of green technologies. In December 2010, the Obama Administration filed a case against China at the World Trade Organization, complaining about Beijing’s subsidies for wind energy. The danger is that such battles—eco-protectionism versus eco-mercantilism—will take precedence over more cooperative policies in pursuit of green technologies.

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China, eco-mercantilism, eco-protectionism, high-speed, investment, rail, transportation