I came across an article in yesterday’s New York Times Business section, China Is Eager to Bring High-Speed Rail Expertise to the U.S. which I feel raises a rather interesting sourcing dilemma for governmental officials in California. For readers who may not be aware, the State of California has plans to build a high-speed passenger train link between the cities of Los Angeles and San Francisco. This massive project is in its planning phases, and the Times article notes that nearly 150 years after American railroads utilized Chinese laborers to build rail lines across the U.S. Western region, the Chinese government has signed preliminary cooperation agreements with the State of California and General Electric to be a potential bidder for construction of this initial high speed rail corridor.
This poses an interesting dilemma for California officials from two perspectives. First, China’s rail ministry has been gaining worldwide attention for its engineering competence and reputation for overall speed in building high speed rail networks. The ministry has undertaken and completed massive high speed rail construction within mainland China, and begun projects in Saudi Arabia, Turkey and Venezuela as well. Second, China’s ministry can compete on the basis of low cost through its leveraging of massive economies of scale in engineering, labor and construction equipment resources. China has chosen to partner with General Electric to license its technology, and the preliminary agreement calls for GE to source at least 80 percent of locomotive and system control equipment among U.S. suppliers. China would source the remaining 20 percent, license its technology, supply engineers and is even willing to help finance the construction utilizing some of its $2.4 trillion in foreign reserves.
No doubt, the State of California can explore other alternatives including proven expertise from suppliers in France, Germany and Japan. A little over a year ago, Supply Chain Matters provided our commentary noting the reality that the U.S. is very late in competency to build intercity high-speed rail networks, and building a world-class line would have to have some dependence on a more experienced non-U.S. partner. if you need to build a world-class network infrastructure on an aggressive timeline, go to the experts who have the most experience in on-time delivery or operation of such a network. We also called attention to the opportunities for economies of scale, since the technology and supply chains for both the track infrastructure as well as these trains already exist.
The State of California now faces a complex sourcing decision unlike many faced by other supply chain sourcing professionals. The China alternative presents strong positives in overall cost, competency and long-term financing, but may present rather dicey political sensitivities. GE also does not have any track record per se in producing high-speed electric locomotives. Other proposals from France, Germany or Japan could bring proven locomotive, engineering and equipment expertise, but may not be able to match the cost advantage of China. An interesting dilemma, to say the least, one that may require utilization of rather sophisticated project sourcing weighting expertise. Then again, when governments are involved, political forces can never be ignored.
What’s your advice to the State of California? Low cost, proven expertise or source for maximum American jobs and technology transfer?