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China railroaded into fast-train technology trapFast-train firms paying heavily for technology transfer decisionsBy Wang Chen12 July 2012The professional dreams of a team of locomotive designers and rail systems engineers sped along steel tracks through the countryside of northeastern China.The year was 2003, and high-speed track testing was under way between the cities of Shenyang and Qinhuangdao for the China Star bullet train, the pride of an engineering team assigned to jump-start the nation’s all-new, high-speed railroad.Technicians led by the project’s chief engineer Liu Youmei had developed the China Star and its track components from scratch as part of a 130 million yuan ($20.4 million) (ICAPC:USDCNY) , Ministry of Railways effort to upgrade the nation’s vast railroad network, promoted by the then minister, Fu Zhihuan.The ministry hoped the China Star, with a top speed of 270 kilometers per hour (about 169 miles/hour), would help state-owned businesses from train manufacturers to track construction companies carve out a market niche and successfully compete against the world’s largest bullet train manufacturers.Moreover, Liu’s team wanted to prove that Chinese engineers and craftsmen had what it takes to build world-class fast trains independently, from top to bottom, without the foreign-based multinationals that dominate the global market.But the team never really got a chance to prove itself, and the China Star tests were essentially for naught. A few months after the train’s experimental run, the railways ministry slammed the brakes on indigenous high-speed rail technology research and radically changed the course of national railroad development.Leading the turnaround was Liu Zhijun, who succeeded Fu to become the head the railways ministry in March 2003. After taking office, the new minister decided to refocus the nation’s high-speed rail program and introduce a “market access for technology transfer” policy.The policy emphasized doing business with the same multinationals that Liu Youmei’s team had long dreamed of beating. Eventually, billions of yuan in contracts would be awarded to multinationals and their Chinese joint ventures.The plan called for acquiring the rights to key rail technology from multinational giants such as Kawasaki Heavy Industries, Bombardier Inc. and Siemens AG for use by Chinese state-owned companies.Buying foreign railway parts as well as patents and blueprints, Liu and the rest of the ministry’s leaders reasoned, would spark rapid expansion of the fast-train network and give domestic railroaders the technical know-how to make exportable, highly profitable products.China Railway Materials plans $942 million IPOChina Railway Materials is planning to raise up to $942 million in an IPO in Shanghai and Hong Kong as China looks to ramp up economic growth.Abandoning the China Star project for a technology-transfer initiative has had enormous financial and business consequences for the Ministry of Railways, which controls the nation’s trains, tracks and most rail sector companies, from locomotive manufacturers to tunnel builders. The decision also shattered indigenous bullet train dreams.Multinationals riseBy 2006, high-speed railway construction projects were going full-tilt in China, while the ministry’s expenditures and debts were rising rapidly.Spending on the nation’s growing rail system jumped to more than 700 billion yuan in 2010 from about 209 billion yuan in 2006, with much of the funding borrowed from state-run banks. Money was poured into fleets of trains as well as dedicated tracks, tunnels and bridges for bullet lines nationwide.Ministry financial reports show net assets, much of it tied to the expensive fast train network, increased to 1.57 trillion yuan in the first quarter 2012 from 862 billion yuan in 2006. The system now includes 6,552 kilometers of high-speed tracks.
At the same time, the ministry’s liabilities grew to 2.43 trillion yuan from 640 billion yuan. That amount included 1.72 trillion yuan owed creditors and a 172 billion yuan debt to the government’s China Development Bank, said Liu Yuhui, director of the financial research of the Chinese Academy of Social Sciences.What did the ministry buy? For starters, a total 55.3 billion yuan was spent on 280 complete trains in 2006 built by multinationals based in France, Germany and Japan, said Jin Luzhong, former director of the State Committee of Science and Technology.The ministry also paid 30.5 billion yuan for 1,098 locomotives and handed over $500 million yuan in technology transfer fees to multinationals by the end of 2006, he said.Before he was sacked on corruption charges in 2011, Liu joined other ministry officials in repeatedly touting the technology transfer project as an inexpensive, efficient way to build fast-train rail lines and an associated manufacturing sector.They have pointed to several major achievements, including putting the world’s fastest train into service on the line between Beijing and Shanghai in 2011. In addition, they argued, Chinese companies got the intellectual property rights for various railway products by paying multinationals a relatively low 2.3 billion yuan in technology transfer fees.What ministry officials often fail to mention, though, is that the state-run companies and indigenous technology teams like the China Star’s builders have been forced to play second fiddle to the multinationals and their Chinese joint ventures.Meanwhile, the multinationals have benefited from, for example, the ministry’s tender and negotiating procedures.One example has often been cited by the ministry to prove the success of the strategy is its negotiation with Siemens. The German company won contracts for rolling stock after playing tough and losing the first round of bidding, but later cutting its price and winning a number of lucrative orders.At one point, sources said, Siemens demanded a 390 million euro ($4765 million) fee for the rights to a special technology. The ministry said it would pay no more than 150 million euros, and later Siemens cut the fee to 80 million euros.But in the long run, the German company was rewarded for its cooperative spirit with a 750 million euro contract for trains and components, minus the technology rights.The deal was part of a 39 billion yuan contract for 100 fast trains supplied by Tangshan Railway Vehicles, China Northern Railway Changchun Railway Vehicle Co. (CNR), and the China Academy of Railway Sciences — each of which purchased components from Siemens.Another beneficiary of ministry deals was the German train-brake manufacturer Knorr-Bremse Group, which so far has supplied 80% of the brake components installed on Chinese fast trains.Through a special arrangement with the National Reform and Development Commission (NDRC), the government’s top economic planner, Knorr was allowed in 2004 to build a wholly owned factory in Suzhou for critical, high-tech brake parts, thus giving the company access to the Chinese rail market without a technology transfer.Liu Youmei said that through the ministry’s program “there has been some improvement in intellectual property rights” access for Chinese companies “but we don’t understand the core technology.”And the ministry’s plan to grab a profitable slice of the global fast-train market for Chinese companies, an NDRC source said, is fantasy. Indeed, Chinese companies have yet to export a single, competitive, high-speed passenger train.A marketing source at manufacturer CSR Corp., builder of the CRH380A train running on the Beijing-Shanghai line, said the Hong Kong government in March agreed to buy nine of its 350 kph trains. All these trains will run on the line connecting Guangzhou and Hong Kong. Another CSR source said most of the company’s recent exports have been intercity trains with maximum speeds of 160 kph.
Zhuzhou Electric Locomotive Co. and CNR recently bid to supply trains for a rapid-transit project in Malaysia that could be worth 3 billion yuan.Meanwhile, CSR hopes to compete for high-speed rail projects in Florida and California with U.S.-based General Electric Co. Likely competitors are Siemens, the French multinational Alstom (EPA:FR:ALO) (OTN:ALSMY) and Canada’s Bombardier.Meanwhile, Russian Minister of Transport Igor Levitin recently said his country would not buy China’s high-speed trains, but he offered Chinese railroad builders a chance to invest in the nation’s fast-train projects.Homegrown wiltsTrain manufacturers including CSR, Zhuzhou and CNR initially started working on bullet trains after the rail ministry started pushing for high-speed transportation in 1990.Working with foreign partners such as Siemens, CSR and CNR eventually built what are now the nation’s most prominent bullet trains, including the CRH380 models that run between Beijing and Shanghai.In the early years, though, their investments were relatively low. And none of the trains they developed exceeded 200 kph.A breakthrough came in September 2001, when the first-generation of China Star started rolling down the tracks between Zhengzhou and Wuchang. But operational glitches and high costs forced it into retirement after only six months.U.S. Secretary of State Hillary Clinton calls democracy in Mongolia “courageous.” The WSJ’s James Areddy explains to Isabella Steger what she was referring to.Experts at an industry forum in 2003 concluded that there was “a significant gap” between China Star and “foreign-made advanced trains at the technical level, and in terms of product maturity and reliability.”At the same meeting, ministry officials including the agency’s then-new chief Liu said China would start buying fast trains from multinationals. Liu was later accused of putting on a show by attacking the Chinese-made trains to make way for foreign brands.The minister “invited the experts he needed and did not widely consult others for opinions,” said a source who attended the forum. “It was a political decision.”Liu managed to quickly change policy in part because the ministry that same year won State Council permission to let China’s rail companies buy high-speed technology from multinationals and work with less NDRC oversight. Afterward, the State Council allocated about 1 billion yuan to the ministry to buy advanced technologies in areas including train body manufacturing, wheel systems and brakes.NDRC, meanwhile, has seen its supervision responsibility on railway technology import to be shifted to the Ministry of Railways, following the State Council’s order.“We couldn’t even review the program” for fast trains, said an NDRC source.“The Ministry of Railways turned out to be the one introducing technology, and then it would assign it to companies rather than allocating the money (from the central government) to leading companies and let them introduce technologies,” the source said.Earlier, during those heady years of homegrown research, CSR Nanjing Puzhen Co., the maker of China Star, also built locomotive models called the Aoxing and Xianfeng. Some Aoxings were sold to a railway in Kazakhstan.A homegrown model built by Zhuzhou and CNR called the Lanjian has been running on the Guangzhou-Shenzhen line since 2001, but at times it’s been idled due to frequent malfunctions.A ministry call for a 270 kph train later led to the China Star project. But after Liu abandoned the China Star program, the railways agency issued a new directive for more putting advanced, 300 kph trains on all-new, dedicated tracks.Huge contracts were eventually awarded to Kawasaki, Alstom, Bombardier and Siemens. The multinationals cut cooperation deals with CNR and CSR subsidiaries for train cars and components assembled at Chinese plants, with foreign blueprints and manufacturing oversight.
In November 2006, the Ministry of Railways began accepting bids to supply trains for the nation’s first, modern high-speed rail line between Beijing and Tianjin. A German consortium led by Siemens won the 12 billion yuan contract.The technology transfer project has worked to a degree, as several domestic manufacturers have benefited. Alstom technology was transferred to CNR; Kawasaki technology went to CSR; Bombardier transferred technology to its joint venture, Bombardier Sifang Power Transportation Ltd. in Qingdao; and Siemens handed over technology to CNR Tangshan Locomotive and Rolling Stock Work.But to date Zhuzhou, which for years was a main force behind indigenous research and development, has been shut out of these foreign technology transfers.Neither have Chinese railroad companies won the kind of respect they hoped to get through homegrown development. Repeatedly through the years, multinationals have argued that none of China’s fast trains are truly Chinese but are simply hybrids that would die without technology from abroad.Some multinationals have tried pushing Chinese companies into a legal corner. Kawasaki, for example, in 2010 said its lawyers were looking into whether its patented technology was being used by CSR to make products that could be sold overseas.In 2010, railways ministry officials claimed they got a bargain by paying 1.7 billion yuan for all intellectual property rights attached to manufacturing the CRH380 bullet train.The 2009 stage-one plan for the CRH380, said a source familiar with a CNR-Ministry of Railways discussions that year, was for the Beijing-Shanghai trains to race at 380 kph (thus the train’s name) and complete a one-way journey in less than four hours.At the time, Kawasaki experts said such speeds could not be maintained on the entire stretch of track. The technical roadblocks were cleared after the ministry decided to design the train to fit parameters of the tracks, but the multinationals maintained their grip anyway.An engineer working for a Siemens subsidiary in China said technology transferred for development of the CRH380, as stipulated in a contract agreement between the company and the railways ministry, cannot be used in products made by Chinese companies for export.“China bought patents” for the fast trains, said Zang Qiji, an expert at the Chinese Academy of Railway Sciences, “but the intellectual property rights are still with the foreign parties.”Besides, said the Siemens engineer, the CRH380 locomotive is not really a Chinese train but a Siemens CRH3 model with a reshaped nose.
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