The Supply Chain Matters blog provides our initial 2019 update on Chinese branded subway cars appearing in U.S. transit systems, and the now changing perspectives brought about by ongoing trade tensions among two countries.
In 2014, Supply Chain Matters first alerted our readers to the potential of Chinese produced railcars appearing in a U.S. transit system. At the time, the Massachusetts Department of Transportation had awarded a contract to China’s state-owned rail equipment manufacturer CNR Corp. for the replacement of 284 modern subway cars. Existing subway cars were in excess of 20 years old. The important headline for this development was the awarded contract cost, namely $567 million, a rather compelling sum for this amount of modern equipment. It was a bargain, considering bids from other equipment providers.
The deal broke ground in the presence of a U.S. beachhead for the China state-owned company. The contract stipulated that 60 percent of equipment manufacturing would have to take place in the U.S.. We speculated that the subway car’s major components would be imported directly from China, most likely shipped via an expanded Panama Canal routing to an east coast port.
In 2016, the Massachusetts based MBTA Control Board voted to authorize as much as $277 million to acquire an additional 134 Red Line railcars, as an extension of the existing contract with the China based railcar producer. This amended change to the existing contract bypassed standard bidding procedures because the agency indicated that it was seeking to standardize its entire network-wide fleet. The agency had initially considered rebuilding the 184 existing Red Line cars not scheduled to be replaced in the initial CNR contract, but a financial analysis indicated that brand new cars would cost as much as $310,000 less than overhauling the existing ones.
It was at that time that Supply Chain Matters raised initial speculation that the incoming Trump Administration may not be shy in slapping increased tariffs on Chinese parts and components imported into the United States. We wondered aloud what that would mean for overall contract pricing or local manufacturing.
In 2017 we updated readers that the momentum had increased. Since the Massachusetts deal, China’s government facilitated the merger of its 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 then landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority’s rail car equipment. The deal amounted 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 CSR Sifang America bid came in at a reported $226 million lower than that of Bombardier Railcar Equipment, the most recent manufacturer of Chicago’s railcar fleet. 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.
That was followed with contracts to supply new subway cars for both the Philadelphia and Los Angeles subway systems, both at attractive industry pricing, and both requiring forms of local manufacturing presence at the Springfield Massachusetts assembly facility.
Emerging Trade Tensions and New Factors
In August of 2018, we highlighted a report that the U.S. Congress was considering legislation that could ban the production of Chinese manufactured railcars in the United States. From our lens, that legislation was yet another effect of escalating trade tensions involving the U.S. and China, and how politically-motivated actions subsume industry market forces. This legislation reportedly stemmed from concerns from existing U.S. based freight car manufacturers Trinity, and Greenbriar and unnamed others, that CRRC might leverage existing U.S. based subway car manufacturing facilities as a beachhead to expand into freight car market needs, undercutting existing U.S. manufacturers. That legislation did not come to pass.
In December of 2018, the Boston Globe reported that CRRC was pressing the Trump Administration to exempt it from 25-percent tariffs on a number of components imported from China, including subway car frames, air ducts, and boxes to hold batteries.
There is now a broader twist to these developments.
In the Fall of 2018, the Washington Metropolitan Transit Authority, the transit agency overseeing the Washington DC Metro system-initiated plans to procure 256 modern termed 8000 series subway cars to replace a rapidly aging existing fleet. The full replacement effort can be upwards of 1000 cars in total.
The specifications call for the most advanced technologies in auto train control safety, high definition security cameras and rider comfort. The agency is on record as noting that cost is a major factor because the system has long been hemorrhaging money for quite some time.
One of the bidders is CRRC, which according to reports is expected to be a strong contender for the acquisition contract.
The new twist to this saga, relates to the ongoing trade tensions with China. Five members of Congress who represent the DC region have expressed fears that foreign adversaries can possibly gain control of subway systems, specifically the DC Metro system. A letter to the agency indicates that while other cities have welcomed investment in foreign manufacturers, there are serious concerns when it can involve activity surrounding the U.S. Capital. Those concerns related to cyber hacking threats, similar to the perceived Huawei Technologies threat in telecom networks.
For its part, Metro system officials have now reportedly amended the rail car specifications to include provisions for adhering to NIST cyber security standards including the integrity of hardware and software. The specifications reportedly further calls for all code related to equipment to be audited by an independent Department of Defense cleared contractor.
Additionally, there are further calls for federal legislation to address nationwide passenger rail system safeguards related to cyber threats.
Supply Chain Matters Perspective
This ongoing five year set of developments provides a number of themes.
The original primary theme was budget constrained transit agencies operating rather old and repair-prone subway cars had to find a means to replace such equipment at the lowest cost. A state-owned Chinese rail equipment manufacturer seeking to penetrate a rather large, untapped market, was willing to be aggressive in bidding and in establishing required local manufacturing presence to conform to a required 60 percent threshold for local component or final assembly manufacturing. Today, there are at least two CRRC manufacturing facilities in the U.S., staffed by hundreds of U.S. employees, with multiple years of existing backlog work
Market success equates to opportunity and value for both the buyer and the seller. Hence, multiple transit agencies elected to go with CRRC. Modern equipment and technology at significantly lower cost- the supply chain sourcing secret sauce. Overall reliability remains an open question but similar equipment operating in multiple nations at the surface appear to be reliable.
Since the current U.S. Administration took office, trade tensions with China have escalated along with concerns for intellectual property protections and mitigating sophisticated cyber-espionage threats from state-sponsored groups. A cost threat concerns any added U.S. inbound tariffs related to CRRC supply contracts (Beyond the March 1st moratorium) or to lobbyists who continue to favor domestic rail equipment manufacturers.
The yet to be awarded DC Metro contract is the obvious next chapter.
While combating cyber security threats is an important safeguard, the backdrop of a Chinese company adds a special political dimension. Subway cars with added cyber threat mitigation will invariable cost more. Will the riding public accept that?
We cannot portend where all of this is headed, and what the DC Metro decision will ultimately be. Suffice to note that certain subway transit agencies were very savvy in recognizing a market opportunity.
Opportunity opens a door, while added developments close such doors. Particularly when they include political dimensions. Such political dimensions often have meaning in supply and demand network support strategies.
We all get to see where the new chapters of Chinese branded railcars across the U.S. ultimately include. It will be one test of a true meaning of globalization or open markets.
© Copyright 2019, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.