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Bombardier’s Italian train operations are the perfect example of globalization in rapid motion. The Canadian company’s factory, acquired when it bought Germany’s Adtranz, designed Europe’s fastest train, the Frecciarossa (Red Arrow) 1000, which entered service on June 5 with the Italian state railway. The trains themselves are being assembled by AnsaldoBreda, a subsidiary of the Italian defence and aerospace giant Finmeccanica. AnsaldoBreda is soon to come under the control of Hitachi, the Japanese industrial heavyweight that is trying to crack open the European market.
When Bombardier developed the bullet trains, it probably never imagined they would be banged together by a Japanese company in Italy. The question now is whether Bombardier’s own train division, known as Bombardier Transportation (BT), is the next train business to swap owners in an industry undergoing momentous change.
Globalization has turned BT into one of the world’s top suppliers of train systems, from subway cars and high-speed trains to signalling equipment and elevated monorails. But globalization has also hurt. As competition intensifies, austerity-mad governments demand discounts and profits take a beating. So the West's biggest established players—Bombardier, Alstom of France and Germany’s Siemens—are rewriting their playbooks. BT’s own profit margin, defined as earnings before interest and taxes, slumped to 5.1% last year from a relatively healthy 7.5% in 2010. The status quo, in other words, is not working.
Meanwhile, the aerospace half of Bombardier is in an even tighter spot. Bombardier is No. 995 on this year’s Top 1000, with a loss of $1.26 billion last year (all currency in U.S. dollars unless otherwise noted).
Bombardier’s response to both problems, announced in May, is to transform BT into a publicly traded company, one that will have the freedom and currency—its shares—to form partnerships, take on new investors or make or solicit full takeover offers. When the IPO for a minority stake was announced, Bombardier’s new CEO, Alain Bellemare, said the sale is designed to “strengthen our financial position while preserving flexibility to participate, if we wish, in further industry consolidation.”
Clearly Bellemare is leaving every option open for BT, which had revenues of $9.6 billion in 2014—almost half of the company’s total revenue—an order backlog of $32.5 billion and 39,700 employees. But the scenario everybody in the industry talks about is the possibility of effectively turning BT into a Chinese company with a Canadian face. A former Bombardier rail executive, who did not want to be identified, says the brain trust in Montreal knows perfectly well that combining BT with the train divisions of Alstom or Siemens—similar businesses with similar technology in similar markets—makes little strategic sense. What would make sense is bringing in Chinese train companies, which are desperate for a high-profile European or North American “agent” to ease their products into the West, the glaring hole in their otherwise burgeoning market. In return, Bombardier would no doubt get a high valuation for BT, as well as the use of inexpensive Chinese technology and manufacturing and greater access to high-growth Asian markets.
Or Bombardier could just get a big fat cheque for most or all of BT, forget about trains and spend the rest of its days building aircraft such as the C Series, the passenger jet whose delays, cost overruns and disappointing sales probably triggered the IPO. Bombardier needs more resources to keep its cash-chewing plane division airborne.
Bombardier won’t talk about the BT share sale, which is expected before the end of the year, or what might happen to the train company after it hits the German stock market (BT is based in Berlin). But it’s no secret that the European train industry is about to become the stalking ground for the Chinese. At one point, the Chinese were in the running to buy AnsaldoBreda, largely because they coveted its railway traffic management system. Diego Canetta, the technical project manager for the Frecciarossa 1000, says, “There is no doubt the Chinese want to get into the European market. They have nothing here, but they have money.”
Bombardier, Alstom and Siemens no longer can claim top-dog status globally. The top spot now belongs to CNR and CSR, the state-controlled Chinese train makers that are set to end their rivalry and merge, creating a train colossus with a mandate to take on the world. Already, CNR has pulled ahead as the leading maker of rolling stock. The merged company will have about $32 billion in annual revenue, which exceeds the combined rolling-stock revenue of the three Western biggies. In a recent report, bond rating agency Moody’s said the “merger of the two [Chinese] companies is a negative” for Bombardier, Alstom and Siemens “because it will create a stronger competitor in the already competitive global market for railway and metro transportation equipment.”
As big as they are, CNR and CSR are non-entities not just in Europe but in the entire Western world. China’s one notable success in the North American train market came last year, when CNR bid a lowly $567 million to replace 284 metro cars operated by the Massachusetts Bay Transportation Authority, in Boston. Bombardier’s offer was just over $1 billion. No wonder CNR won. The Canadian, European, Japanese and Korean train makers can’t compete with the Chinese on price. They will have to compete on quality, innovation, servicing, financing and job creation, areas in which the Chinese are at a distinct disadvantage in the West, especially in Europe.
Of course, that could change if they were to buy a Western company.
Bombardier’s Italian factory might be the prettiest industrial site in the whole country, maybe the whole Mediterranean.
It’s located on the Italian Riviera, about halfway between Genoa and the French border. The factory lies between the beach and the lush hills behind the port town of Vado Ligure. It started life in 1905 as an electric locomotive factory owned by Westinghouse. The original long, low-slung buildings, covered in pink stucco, are intact and well-preserved. A vintage electric locomotive, a hulking beast painted mustard yellow, is on display on the lawn in front of Bombardier’s offices.
The only hint of modernity, at least from the outside, is the short test track just beyond the main entrance. On it sits the prototype of the Frecciarossa 1000, whose completed incarnation is now being shipped to Trenitalia, the national passenger rail company that is covering the country with one of the world’s most advanced high-speed rail networks. Italy has ordered 50 Frecciarossa 1000 trainsets—400 carriages in total—valued at €1.5 billion.
The new Frecciarossa would be unimaginable in North America. It is capable of travelling at 400 kilometres per hour, or 60 km faster than the fastest Ferrari. Its “commercial” speed will be 360 km/h, allowing it to travel between Rome and Milan, a distance of more than 500 km, in a promised two hours and 20 minutes (the average Via Rail train takes about five-and-a-half hours to cover the same distance, between Montreal and Toronto). At the moment, the fastest service on the Rome-Milan run, which uses a few Bombardier trains that can hit 300 km/h, takes about three hours.
Canetta, 58, who is from Milan, provides a tour of the train. It is composed of eight carriages—collective weight 500 tonnes—that stretch 200 metres from tip to tail. The sleek interior, with its muted colours, looks like the business-class section of the newest Boeing or Airbus. The carriages have wheelchair access, 4G WiFi that will be offered free to passengers, a “bistro” car, leather seats throughout and spacious washrooms. Of the four seating types, the highlight is executive class, which comes with a sleek meeting room behind a curved glass wall, an electric shoe polisher and plush swivel chairs that would look perfectly at home in the office of a Fortune 500 CEO. “We think this class will be used by professional sports teams more than politicians or businessmen,” Canetta says.
But it is the components that lie under the carriage, not in it, that make the train a technological marvel. Most regular trains, including earlier Frecciarossa models already in service, are pulled (or sometimes pushed, or both pulled and pushed) by an electric locomotive that occupies most of a carriage. The new Frecciarossa 1000 has no locomotive; instead, the electric motors are housed between the wheel sets (called bogies) in four of the eight carriages. Bombardier did not invent the system, but has refined it. The advantages are enormous. While top-end speed has not increased much, traction has, since half the carriages have their own motors. As a result, the acceleration is dazzling. The new Freccia-rossa can reach 300 km/h in about eight minutes; the old ones take three times as long. That’s why the new trains can knock so many minutes off inter-city travel runs.
Eliminating the locomotive leaves more space for paying passengers. The new Frecciarossa was also designed to be the first high-speed train that can be used throughout Western Europe. While the track size is the same everywhere, the voltages vary. It doesn’t take much more than the flick of a switch in the driver’s cockpit to go from, say, Italy’s 25,000-volt system to Germany’s 15,000 volts.
Would the Chinese—CNR and CSR—want access to this technology? Yes and no. No, because they have a version of it already in the form of the Zefiro high-speed trains, which are produced by a Bombardier-Chinese joint venture in China. Yes, because they lack a high-speed product, indeed any product, that has made big inroads in Europe, which remains the world’s largest train market. The region looks likely to retain that distinction as electric rail, not highways or planes, emerges as the most efficient and cleanest way to move large numbers of travellers.
Selling trains and all the paraphernalia that goes with them, from signalling equipment to electronic safety systems, is a sophisticated and laborious art requiring armies of engineers, designers, production employees, lobbyists, marketers and financiers. To sell a train in Europe, offering a good product is not enough. Government buyers want an entire ecosystem to go with it. To justify the expense to taxpayers, the train, or much of it, has to be produced locally to create jobs. Ideally, the technology should be homegrown, to keep engineering schools full. Post-sale maintenance teams must be in place and cheap financing available. The Chinese understand this well. No Western industrial company can get far in China without creating Chinese jobs, which means forming a joint venture.
In Europe and its other markets, BT is competitive because it is well-established and vertically integrated. In Europe, it is considered a European company in the same way that Opel is considered a German car company, even though it has been owned by General Motors since the 1930s. BT is run by Europeans. Its president, Lutz Bertling, is German. His predecessor, André Navarri, is French.
Bombardier got into trains by accident. In the early 1970s, it bought an Austrian company, Lohner, that made the small gasoline Rotax engines used in Bombardier’s snowmobiles. Lohner, which at various times in its 150-year history made everything from biplanes to Ferdinand Porsche’s hybrid-electric car, owned an old tram business, which Bombardier decided had great potential in a world suddenly worried about high oil prices—the Arab oil embargo hit in 1973. “I never dreamed that buying an engine business in Austria would take us into mass transit, but it turned out to be a fortuitous move,” Bombardier chairman and former CEO Laurent Beaudoin told McKinsey Quarterly in 1997.
BT grew through a bewildering array of acquisitions, mostly in Europe, but also in Australia, Mexico and the United States. Its breakthrough deal came in the 1980s, when it won a $1-billion contract to supply 825 subway cars to New York City. It had some high-profile setbacks along the way, too, including the delay-plagued Las Vegas monorail, the technically flawed high-speed Acela trains operated by Amtrak in the U.S. and, in 2011, the failure to win the $2.2-billion contract to build trains for London’s Thameslink line, which put the company’s Derby plant in England in jeopardy.
In 2001, BT became the world’s biggest maker of rolling stock with the purchase of German train giant Adtranz from DaimlerChrysler for the equivalent of $725 million. A year later, Bombardier sued Daimler, alleging that it had vastly overstated the value of Adtranz’s assets (the suit was later settled). The Adtranz purchase was messy in other ways too—it came with too many mismanaged and under-utilized factories—and wiped out BT’s profit margin. Under Navarri, BT went through a brutal restructuring that restored its profitability. With profit margins falling again as the competition heats up and government budgets shrink, Bertling will no doubt subject BT to another restructuring, one that could sink Bombardier’s pretty little Italian factory, whose order book is shrinking.
Bellemare, the Bombardier CEO, insists that “Bombardier Transportation is not for sale. We like this business and it will remain part of Bombardier Inc.” But will it?
At Bombardier, it is obvious that aerospace, not trains, is sacred, all the more so since the company chose Bellemare, an aerospace man, to run the company after Pierre Beaudoin stepped down as CEO in February. The vast majority of Bombardier’s Canadian jobs are in aerospace, not trains. If a limb has to go to save Bombardier, it will be the train limb, like recreational vehicles before it. The IPO of BT indicates that decision has already been made.
Japan’s Hitachi knew that making a splash in the European market would require establishing an instant local presence. So it bought AnsaldoBreda. At the same time, CNR and CSR were reportedly in discussions to buy a controlling stake in BT. Bombardier chose the IPO route instead, which is not to say the Chinese have been shunned. In fact, a publicly traded BT will make it easier for them to step on board. The globalization train has left the station and it is bound to pick up passengers from China.
