In October of 2014 we alerted Supply Chain Matters readers to what we thought was a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system.

The headline back then was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the ’T’. This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract.Boston CRRC subway cars_sized The further significance of this development was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow.

Subsequently, China’s government facilitated the merger of China’s two major state-owned rail manufacturers which included CNR. The combined China Railroad Rolling Stock Corp. (CRRC Corp. Ltd.) then created a local U.S. subsidiary to administer contract delivery needs involving the U.S.

The state-owned China U.S. subsidiary has since landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority rail car equipment, amounting to a $1.3 billion contract to replace 846 rail cars, about half of the existing subway car fleet — the biggest car purchase in that agency’s history. The described new generation of railcars also called for localized final assembly to be performed at a new final assembly manufacturing facility to be located on the Southeast Side of Chicago.

The State of Massachusetts has since opted for adding more subway cars to its original contract agreement, again calling for local assembly with fabricated steel and carriage equipment sourced in China and domestic sourcing of other equipment.

On March 16, CRRC Corp. held a groundbreaking ceremony and began work on the Chicago manufacturing facility. According to a published report by the Caixen News Agency, the 45-acre facility, located in the Hegewisch neighborhood of Chicago is expected to cost $100 million with assembly lines producing 168 rail cars annually starting in November 2018. This facility will similarly assemble subway cars from major fabricated steel components imported from China, combined with domestically sourced U.S. component content, and will employ only 168 people in Chicago.

Yesterday, this same new agency, citing knowledgeable sources, reported that CRRC Corp. Ltd. has now won contracts to supply subway cars to both Philadelphia and Los Angeles transit agencies. According to this report, the Los Angeles deal will see CRRC supply 64 rail cars for the red and purple lines on the city’s subway system with delivery set for either 2020 or 2021. The Philadelphia deal reportedly calls for CRRC to deliver 45 subway cars to the U.S. east coast city for a total price of about $137.5 million. Neither of these deals have been officially announced yet by the respective transit agencies.

This Caixen report further indicates that like the deals in Boston and Chicago, the new agreements for Philadelphia and Los Angeles will require CRRC to set up local manufacturing facilities and buy more than half of components for rail cars domestically.

Further reported, and somewhat even more interesting, is that a consortium led by CRRC and Canada’s Bombardier Rail Unit is currently the lead candidate to supply subway cars to New York City in a deal that could soon be announced.

Thus, in a matter of three years, it appears that China’s state-owned railway equipment manufacturer has been gaining momentum as a provider of modern, technology-laden subway and rail passenger cars with somewhat attractive pricing.

Beyond all the political dimensions of the above, there are now the geopolitical dimensions to consider as well.

If the new Trump Administration in the United States follows through with campaign promises to significantly step-up spending on U.S. transportation infrastructure, would U.S. Congressional leaders be open to a Chinese state-owned company as a qualified supplier of competitive equipment to other U.S. rail networks?

If the Administration further influences the U.S. Congress to pass major corporate tax reform legislation that includes an import tax, or perhaps higher duties for equipment manufactured or fabricated in global manufacturing regions such as China, how would such legislation impact the economics of these recent U.S. transit equipment deals?

These are interesting forces at-play, forces that may have major U.S. cities possibly advocating for open access to global markets like China to modernize long overdue urban and inner city transit at a more affordable cost, while balancing the supply chain with imported as well as localized supply chain content.

Obviously, this is an area that will provide interesting developments in the weeks and months to come.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.