CRRC remains a threat to railcar suppliers

CRRC, the Chinese railcar and locomotive manufacturer, remains a threat to the North American rail supply industry despite a new ban on federal spending for railcars built by companies owned or controlled by the Chinese government.

CRRC's corporate parent is a state-owned enterprise that has used subsidies from Beijing to help it win nearly $3 billion in federal and state contracts to supply nearly 750 cars for transit projects in Boston, Chicago, Philadelphia, and Los Angeles. “They have won those contracts in some cases by coming in 20% to 30% below the next lowest bidder,” says Mike O’Malley, president of the Railway Supply Institute, the trade association that represents more than 200 rail industry suppliers.

Underbidding the competition by that much is unheard of. So industry insiders suspect CRRC’s bids are well below its production costs. This means CRRC’s strategy is no different than foreign companies dumping aluminum or steel in the U.S. The goal is to put domestic producers out of business and then corner the market. CRRC disputes this and says it provides good, high-paying jobs for Americans.

CRRC produces transit cars in China, then ships the shells to its plants in Chicago, Los Angeles, and Springfield, Mass., for final assembly. There are no American companies that produce cars for transit and commuter railroad systems. But the European, Canadian, Japanese, and South Korean companies that do build transit and passenger equipment in the U.S. are different than CRRC in several important ways, O’Malley points out. 

First, they are not state-run companies. Second, they often employ more than 1,000 people in their American plants, not just a couple hundred as CRRC does. And third, they use a much higher percentage of American materials and components in their products than CRRC.

Critics say predatory practices have helped make CRRC, created through the 2015 merger of China Southern Railway Co. and China Northern Railway Co., the largest rolling stock producer in the world. 

Lawmakers, the Defense Department, and manufacturers have all raised national security concerns about CRRC supplying transit vehicles for American cities. It’s probably a valid concern, and one that helped get legislation passed last month that puts several restrictions on companies with ties to the Chinese government.

The new law, part of broader defense legislation, bans the use of federal spending on transit projects that purchase equipment from Chinese state-owned companies. It also prohibits the Washington, D.C., transit system from buying Chinese equipment. In a compromise, the legislation permits current CRRC customers to buy more cars. And it includes a two-year grace period that permits CRRC to solicit new orders elsewhere in the U.S.

The federal legislation has several shortcomings. Chief among them: It does nothing to protect North American freight car and locomotive manufacturers from unfair competition. 

You may think that North American railroads, and the shippers and leasing companies that own most of the freight car fleet, would avoid buying Chinese railcars. But look what happened in Australia. A decade ago, three manufacturers Down Under produced nearly 70% of the country’s freight cars. Chinese firms supplied the rest. Today you can’t buy an Australian-made freight car. CRRC wiped out the Aussie industry. 

“Our findings illustrated a pattern of anti-competitive behavior with respect to pricing freight railcars, which ultimately led to the collapse of Australia’s freight railcar manufacturing industry,” Hamilton Galloway, a consultant with Oxford Economics, told a congressional panel last year. 

Galloway, whose firm studied the threat from state-owned enterprises, warned what could happen here: “If similar practices were to occur in the U.S., it would threaten the 65,000 jobs supported by freight railcar manufacturing. This problem is further amplified because measures designed to preserve domestic production and content, such as Buy America, do not apply in the freight rail sector.”

The Chinese effort to produce freight cars in a North Carolina plant failed after a four-year run. Vertex, which was owned by a Chinese consortium that included CRRC, went belly up last year. 

But the Chinese likely will be back. The North American freight market is simply too big to ignore for long. And CRRC itself has said it’s bent on global domination. In a 2018 tweet that has since been deleted, the company said: “So far, 83% of all rail products in the world are operated by #CRRC or are CRRC ones. How long will it take for us conquering [sic] the remaining 17%?”

How long indeed.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on Twitter @bybillstephens