19 July 2019

What happens when the rail-building party is over?

China’s rail construction frenzy is nearing the end of the line, so to speak. 

If we count back from 2020, when China will have hit the target of 16,000 kilometers of high-speed tracks that allow for speeds of 200 kilometers per hour or more, we will see just how close the end line is. 

This year, the country will build 1,700 km. of such railways. At the end of last year it had laid 11,028 km., putting it more than two-thirds of the way through. 

That means hundreds of billions of yuan already sunk into the project and billions more in the next six years.

An investment that gargantuan has a way of stretching credulity, especially if we consider how much of it went to contractors and suppliers — from iron smelters, train makers and engine builders to designers and outfitters — the main beneficiaries of the multi-year bash.

These are also the same companies that will have the biggest headache when the party is over.

What are they to do?

One way to tap a new source of income is for these companies to transform themselves in order to serve other sectors, industry analysts told the Economic Observer.

Rail contractors could apply their expertise to commercial infrastructure projects such as expressways and metro or subway lines. Train makers could tap into the latter and fill demand for rolling stock. Engine builders could continue to supply cars and locomotives.

Robust demand for mechanical and energy efficiency, as well as building safety, will help offset the impact on technology companies, but cement makers and steel mills, already suffering from overcapacity, might have a harder time adjusting to the new order.  

If nothing else works, these companies could look beyond the domestic market and start pitching their wares to the world.

One caveat: Most countries in the West have completed their major infrastructure projects.

Although some of them may have plans for a high-speed railway, they’re likely to be on hold as their economies struggle to get back on their feet, says Wen Gang {文崗}, general manager of state-owned contractor China Road and Bridge Corp.

That reduces the prospects to emerging countries which may not be ready for a high-speed rail network.

Supply is one thing, demand is another. The Chinese government has done little to stoke overseas demand for the domestic rail construction industry outside of the occasional TV spots on a giant screen in New York’s Times Square.

For instance, Wen says there is no official English version of the Chinese high-speed railway standard. Communicating with foreign buyers on technical specifications is a problem.

Another underlying barrier is lack of trust in the Chinese standard. State news agency Xinhua reports that China Railway Construction Corp. (01186.HK, 601186.CN), which won a contract to build high-speed railways in Turkey and Iran, was forced to undergo a costly certification after the two governments insisted on European railway standards for everything from signaling devices and locomotives to cement and fasteners.

Chinese railway equipment suppliers and contractors are supposed to leverage their cost advantage and experience in building and operating high-speed railways to win contracts. But their competitive edge is being chipped away by their own shortcomings when they’re up against the European standard.

Still, there has been one big exception. In November, China Road and Bridge Corp. began construction on a quasi-high-speed railway in Kenya that will link the capital Nairobi and the country’s largest port, Mombasa.

Kenyan authorities agreed to adopt the Chinese standard and give priority to Chinese components. China CNR Corp. (601299.CN), CSR Corp. (01766.HK, 601766.CN), China Railway Signal & Communication Corp. and ZTE Corp. (00763.HK, 000063.CN) have since joined the fray.

This is one track China could pursue. African countries with strong ties with Beijing and with the means to build a high-speed rail system can be a new wellspring for Chinese railway companies when their own wells dry up.

– Contact the writer at [email protected]



EJI Weekly Newsletter

Please click here to unsubscribe