The following question was recently posted on Quora:
“How did China become a strong competitor in the high-speed rail industry?”
Read the following responses:
Big bucks, hostility to Japan and a well adapted Game Theory strategy.
First, a little bit of background:
China has long wanted to upgrade its massive rail network to the standards of Japan and France. From day one, the leadership knew this was going to be a big cake for whoever wins the bid, as the scale of the potential High Speed Railway (HSR) coverage is unheard of in this industry.
The rule of engagement is set out very clearly from the beginning: any firm wished to bid in this mammoth project must transfer their technology to Chinese domestic partners.
Although it may sound like shooting oneself in foot by transferring cutting edge technology to a developing country with huge industrial capacity, the accountants soon worked out that even if a firm transfer all of its technology, the profit from the project will still more than offset the cost of R&D for the next generation of HSRs (this idea was heralded by Bombardier who started transferring technologies since as early as 1998).
The Big Bucks:
In 2010 alone, the Ministry of Railway (MOR) invested over US$100 billion in new construction. The next year, in 2011, another US$100 billion is invested. If compared with military expenditure, this places MOR as No.3 in the world, behind USA and China and ahead of Russia (US$87 billion in 2013).
With this much cash on the table, the project has become a modern day gold rush for the likes of Siemens, Alstom, Bombardier and Kawasaki.
Hatred of Japan:
Initially, Shinkansen train sets (Kawasaki) was going to be awarded to supply the entire project. Once made public, the decision was overturned by angry nationalists who gathered over a million signatories against the deal based on Japan’s unresolved WWII atrocities.
As a result, the bidding process re-opened to start favoring European and North American companies. The structure of bidding also changed - it has decided that instead of a winner-takes-all scenario, all participants are going to have a slice of the cake which lowered the risk as well as maximized technology transfer benefit to domestic train makers.
To the Chinese train makers, instead of obtaining one type of technology from Japanese train maker, they now have access to all types of HSR technologies thanks to the re-structure.
Game Theory:
The foreign bidders were played off against one another in a text book Prisoner’s Dilemma: holding out on technology transfer or refusing to lower prices will yield maximum profit but risks missing out entirely on the bidding. If all Chinese requirements are met, however, the profit margin will hurt greatly as well as facing risk of losing one’s market leader position by nurturing Chinese competitors from end to end.
The high octane game ended surprisingly well to the Chinese - the final contracts are not only similar in structure with the aim to offer maximum assistance to domestic partners in digesting and maturing foreign technologies (e.g. from the 60 train set orders Kawasai won, three would be built in Japan, six kit sets would be assembled in China and the remaining 51 would be made and assembled in China), but also set a new low cost benchmark for the HSR industry.
Siemens was the only one who decided to stood its ground - but not for long. Due to its high asking price, it was the only train maker not awarded any contract in 2004. The following year, Siemens reshuffled the bidding team and lowered its price to win a 60 train set order in the 350km/h category.
As a group, the major train companies ‘lost out’ on maintaining their competitive advantage by failing to squeeze out maximum profits to maintain their lead for the next-gen HSR to fend off the inevitable assault from the very competitors they helped raised.
Conclusion:
China has significantly reduced its partnership with western train makers in the on-going HSR expansions. The reliability and speed of domestic trains have steadily improved to a satisfactory level, often exceeding the specs of the original train sets designed by western train makers. Although China’s overseas HSR bids have yielded mixed results so far, it has leaped over hurdles that would otherwise take decades to overcome.
One can say that China bought its way to become a serious contender in the HSR industry. Even with a deep pocket, this is still easily said than done without an uncompromising goal and a highly efficient governing structure.
When China was first establishing their high-speed railway industry, they contracted with the major players that were building high-speed rail: Alstom (France), Siemens (Germany) and several Japanese manufacturers including Hitachi. Rather than simply paying these firms to build rail, the Chinese required them to partner with a Chinese manufacturer and turn over all the intellectual property and knowledge necessary for the Chinese manufacturer to be able to build high-speed trains independently of the overseas supplier by the end of the contract. These contracts were typically ten years. These contracts were very lucrative, and the international firms were happy to sign on.
The result is that there are now several Chinese manufacturers now that have been completely brought up to speed with the latest technologies and are now building their own trains to the same standards as the Europeans and Japanese.
Vivek Kumar, Transporation @ UT Austin:
Let me tell you an observation deep-rooted in Chinese history which spans quite a few century. Buddhism was founded in India around sixth century BC and it made its way to many countries in Asia and Eastern Europe. It is believed that, Buddhism was introduced in China through the silk route in around 1st century CE. The form of Chinese Buddhism what we know of today is called ‘Mahayana sect’ is most well-known, highly practiced and most literature/scripture enriched Buddhism we have. While this may not be a direct analogy, but it gives us the sense of the capability of ‘reverse engineering’ in the DNA of Chinese population.
Come 2015, today China is the High-speed railway (HSR) leader around the globe, both in technology and operation. China has the world’s longest HSR network with over 19,369.8 km (12,035.8 mi) of track in service as of December 2014, which is more than the rest of the world’s HSR tracks combined. This is not due to an overnight planning but a result of meticulous and shrewd planning over the years. Meteoritic rise of Chinese HSR industry was due to the culmination of many social, demographic, economic, industrial and technical reasons. I will try to list out some of them which majorly influenced HSR industry in China. Also, the reasons are ordered in such a way that it will help in understanding China’s journey from HSR development to a dominant player.
1. Geographical Need: China with vast land area, mid-level GDP ($4500 per capita in 2010), substantial population density in central and eastern provinces, and large number of well-spaced cities with more than 0.5 million population is an optimum candidate for high speed rail.
2. Rebalancing growth: Much of celebrated Chinese development was limited to its eastern and southern coast provinces which produced a skewed growth geographically. So, Chinese policy makers are focusing on balancing the growth and HSR is one way to bring the mobility to undeveloped part of the nation. High-speed rail link to connect China’s provincial capitals｜Markets｜Business｜WantChinaTimes.com
3. Market dynamics: China’s integration in global market by its accession to WTO in 2001 after its own two century long self-imposed closed door development required rapid development of its rail transportation system. To maintain the competitiveness in trade, it required faster transportation of raw material as well as human resource throughout the country.
4. Social and cultural events: Two major international events, Olympics in 2008 and World Expo in 2010 sped up the HSR construction needs in China. Historically, HSRs of Japan, France, Germany and Spain were all developed under similar opportunities.
5. Decisive leadership: China was once the hub of innovation marked with inventions such compass, printing, gunpowder etc. However, bureaucratic feudalism robbed the innovative capability of China until Deng Xiaoping took charge. With a re-focus on science and technology coupled with batteries of universities and labs, China was ready to understand, digest and produce new technologies in-house. Under MOR’s policy of promoting privatization and competition, rolling stock factories and research centres were given independent status and split into two large corporations, CNR and CSR. These two later became the forefront of Chinese HSR technology.
6. Availability of public fund: In the period when HSR network was starting to take shape in China, there was no shortage of money for such large scale infrastructure project. While, other countries shied away from investment in HSR, China pumped billions of dollar every year in HSR construction. In 2008, china had around $2000 billion of foreign reserve.
7. Technology transfer: Chinese government had clarified three principles of transferring technology from foreign ventures investing in Chinese HSR construction. A. Import state-of-the-art technology; 2. Joint design and production; 3. Establish local brands. As, Henry Lu pointed out, foreign companies agreed to such demands in the promise of huge untapped market. However, little to their knowledge, they were digging their own grave. China Merging Trainmakers Adds to Pressure on Siemens
‘Made in China’ high-speed trains going global | Asia | DW.DE | 03.07.2014
8. Technology ‘acquisition’- In 2005, the German conglomerate Siemens formed JV with China National Railway Corporation (CNR) on a contract to supply 60 passenger trains for the Beijing-Tianjin high-speed railway. The first three trains were built in Siemens’ German plant. The remaining 57 trains were made in China at CNR’s plant in Tangshan. Siemens also brought 1,000 CNR technicians to Germany for training. However, in March 2009, Siemens announced a follow-on project to provide 100 trains for the Beijing-Shanghai high-speed railway. The Ministry of Railways denied the deal’s existence, saying that the project would use Chinese technology. In the end, CNR was awarded a US $5.7 billion contract and Siemens was contracted to supply US $1 billion in components. Here, we see the shrewd acquisition of technology. Also, it was reported that with reverse engineering, Chinese companies were able to increase the running speed of trains, thus adding another attribute to Chinese HSR industry.
9. Technology Diversification: Unlike South Korea and Spain that have imported technology from a single foreign country, China has imported equipment from many countries and companies, and thus have multiple technology providers. It gave Chinese HSR industry a breath of knowledge of technicalities and selected the best from multiple sources. Additionally, having a state-owned company with all possible know-how helps in new international bids for HSR construction.
10. Low cost, high tech: China’s centralised technology ownership, cheap labour and abundant raw material has allowed it to become the cheapest HSR provider. The construction cost of Chinese HSR is roughly $17m to $21m per kilometre, compared to $25m to $39m of Europe companies. The Chinese state negotiates attractive export terms for its fully-owned HSR tech unlike their rival where different technologies are owned by different companies.
11. Customer Acquisition: China’s deep financial pocket ensures that it is able to provide financial help for construction to prospective customer of HSR. This is a brilliant strategy to knock out competitors. China part financed Ankara-Istanbul HSR by $750m in loans from China, including $500m in loans with favourable terms. Also, China is offering free HSR study to India, its arch-nemesis. China to offer aid for India high-speed rail study.