Birth of an industrial giant

China's plan to merge its two railway vehicle manufacturers CNR Corp and CSR Corp into one conglomerate will create an industrial giant which will provide a significant boost to the country's export sector.

The planned marriage, which will end what had become a harmful price war between the two companies, is expected to create the world's biggest train manufacturer by sales, one which is capable of supplying bullet trains, light rail vehicles and subway cars to markets around the world.

Li Jun, deputy chief engineer of CNR's Changchun Railway Vehicle Co, its bullet train and electric multiple-unit train subsidiary, says the new integrated group will have a clear edge over global rivals by being able to optimize the two companies' technology edge, human capital and production capacity.

CNR and CSR often found themselves competing against each other for overseas orders, examples of which included a contract to build a high-speed rail line to connect Turkey's two largest cities (won by CSR) and the largest export contract of main line passenger trains to Argentina (won by CNR).

Though the Chinese train makers were rarely underbid by competitors from Europe, Canada, Japan and South Korea, they often had to confront each other on price to win international contracts.

"The domestic market for high-speed trains is pretty saturated, so the merger will prevent unhealthy competition and help in the further development of China's rail industry and the sectors associated with it," Li says.

CNR, CSR and a team from China Capital Investment Group submitted the first draft of the merger plan earlier this month to the State Council, which will see CSR issuing shares to amalgamate with CNR.

However, a lot of work still lies ahead on various aspects of the deal, such as sorting out duplication of construction operations and other overcapacity, which have raised concerns about how the new company will be managed economically and efficiently.

Wang Mengshu, an academic at the Chinese Academy of Engineering and an ardent supporter of the move, said that in future China is likely to ship more of its railway capacity overseas, in particular to emerging markets.

Meanwhile, it will also look for sustainable partnerships to invest in new plants and maintenance centers across the world to grow its global market share.

CNR and CSR were previously part of China National Railway Locomotive and Rolling Stock Industry Co, owned by the now-defunct Ministry of Railways.

The ministry divided the company into two parts in 2000, with each given 40 train factories, part plants and research institutes, still owned by the parent company.

"There are enough resources available to allow the new group to offer the whole package of services needed to complete any international project, including infrastructure construction, building and designing the vehicles, maintenance and professional training for local staff if they expand overseas," says Wang.

Wang says it would be logical for the combined company to transfer any surplus production capacity to Latin America, Africa and Southeast Asia over the next five years, markets with huge demand for modern railway networks, training institutes and industrial foundations.

The merger will create a new company with assets of more than 300 billion yuan (S$63.53 billion), a combined market value of US$26 billion, and 180,000 workers.

With each of their technological and engineering capabilities advancing rapidly, the railway enterprises have gradually discovered that projects in developing nations can no longer satisfy their growing ambitions.

At the end of last year, China had a high-speed rail network of more than 10,000 kilometers, far exceeding any other country and larger than the network in the entire European Union, the World Bank said in a report released in July.

"The new group will be more confident to knock on the doors of developed countries that once did not take China's railway products very seriously," says Feng Hao, a rail transportation researcher at the National Development and Reform Commission, the top economic planning agency.

"Chinese railway products not only offer significant price advantages, but after years of working in close cooperation with State-owned rail construction project providers, their technologies and experience are on par with anything in Germany and Canada, for instance," says Feng.

Feng says the government has now prioritized the export of its rail industry, and developed countries such as the United Kingdom and the United States have shown strong interest in allowing Chinese rail companies to become involved in the servicing and upgrading of their rail infrastructure, working alongside local companies.

Wang Xianhong, the deputy Party secretary of Changchun, says a Russian delegation is due to visit soon to discuss cooperative details on a recently signed deal to build a 770-km high-speed line connecting Moscow and Kazan, a city on the Volga River.

Under the agreement, signed in September, the line will form the initial section of a railway stretching all the way to Beijing, with completion scheduled for 2018, in time for the World Cup football finals in Russia. Kazan is one of the host cities.

After being halted for more than 11 years, a new 460-kilometer rail road between Kunming and Hekou, a border county close to Vietnam in Yunnan province, began to operate on Nov 10 to replace the previous Yunnan-Vietnam Railway. That railway line was China's first international railway line, built by the French government in the early 1900s.

Starting construction in 2009, the project was carried out by the China Railway First Group Co and the China Railway No 5 Engineering Group Co, with a total investment of 6.93 billion yuan from the former ministry of railways, which was renamed as the China Railway Corp in 2013.

Within its medium- and long-term economic plans, China has also included another three huge rail lines that will link the country to Southeast Asian nations, and engineers have already started preliminary work on the network, according to China Railway Corp.

The lines would start in Kunming, the capital of Yunnan province, and connect Laos, Vietnam, Cambodia, Myanmar, Thailand, Malaysia and Singapore, linking with the southern part of the ambitious Trans-Asian Railway first proposed in the 1960s.

The network agreement was signed by 18 countries in 2006 and was highlighted within a blueprint for connectivity at the recent APEC conference held in Beijing.

The huge network aims to provide a continuous 14,000-kilometer rail link between Singapore and Istanbul in Turkey, with possible onward connections to Europe and Africa, according to the United Nations Economic and Social Commission for Asia and the Pacific.

Zhao Jian, a professor of rail transportation at Beijing Jiaotong University, said the opportunities expected from the plans could be huge for China's soon-to-be formed CNR/CSR rail conglomerate.

Factbox

China North Locomotive and Rolling Stock Industry (Group) Corp (CNR Corp)

Established: 2008

Revenue in 2013: 97.24 billion yuan

Overseas markets: 80 countries and regions

Status: Listed on the

Shanghai and Hong Kong stock exchanges

Subsidiaries: 29

Employees: 89,000

Headquarters: Beijing

China South Locomotive & Rolling Stock Corp Ltd (CSR Corp)

Established: 2007

Revenue in 2013: 97.9 billion yuan

Overseas markets: 83 countries and regions

Status: Listed on Shanghai and Hong Kong stock exchanges

Subsidiaries: 20

Employees: 91,000

Headquarters: Beijing