Russian railroad machinery manufacturers could enter the league of global market leaders. All conditions are there, such as the competitive advantages created in the Soviet era, room for the industry consolidation, and the longing on the part of businessmen to enter the world elite

Andrei Vinkov

Just a few years ago, the industry was in complete decay. A nationwide decline in demand for cars, locomotives, and track equipment brought almost all enterprises to the verge of bankruptcy. The boom began as recently as three years ago. The rally resulted from investment activity by the former Ministry of Railways, currently transformed into OAO Rossiyskie Zheleznye Dorogi (RZhD), or Russian Railroads. Today, one can point not only to revival of the industry but also to establishment of large efficient holdings based on Soviet assets. To all appearances, Russian manufacturers of railway machinery are able to compete with world leaders.
According to estimates by the German analytical company SCI Verkehr, in 2003 sales of railroad equipment worldwide amounted to around $66 billion, with Russia and CIS countries’ share reaching almost $5 billion. By 2008, the market is expected to increase by another billion. These forecasts by Western experts seem too conservative. RZhD’s officially announced orders to 2010 will contribute $ 3.5 billion a year to the market for cars and locomotives alone. Given the needs of independent operators (around 50% of RZhD’s needs) and companies from other CIS countries, the potential of the railroad equipment market in Russia can be estimated at $12 billion. This is almost 20% of the world market, about the same amount of railroad equipment is sold in the US and Canada. This is why the Russian market could become the ground for competition between world big shots. And this is why Russian businessmen who know more about domestic demand than any foreigner have a chance to compete for the entry into the world elite.

Carmen
In 2003, RZhD doubled its financing of a rolling stock renewal program. In the current year, the volume of investments will increase by another 50%. The railroad plans to purchase around 13,000 freight and 580 passenger cars plus 60 locomotives. It also intends to modernize 6,000 freight cars, over 400 locomotives, and around 400 passenger cars. In addition, RZhD plans to dramatically increase tank car purchases in order to retain over 50% of oil and petroleum-products transportation.
A competitive market has virtually formed on the Russian railroads. It is represented, on the one hand, by the RZhD itself and, on the other hand, by some independent freight- and even passenger carriers. For example, independent carriers operating in some segments of railroad transportation control as much as 20-40% of the market. These operators purchase cars and locomotives on their own, thus forming a consumer alternative to the RZhD. For example, this year Brunswick Rail Leasing announced its willingness to set up a fleet of 10,000 of its own cars by 2008. The company intends to spend half a billion dollars on their purchase. For a start, in July the company placed an order in Ukraine for 500 mineral carriers, half of which have already been leased to the FosAgro Company. And there are plenty of other, similar examples. Even some electric commuter trains have become privately owned.
Independent carriers were the first to invest money in train car and locomotive manufacturing. More than three years ago, they gained access to the railroad infrastructure and then started paying attention to the specifics of the industry. Almost all of the few manufacturers in fact have a monopoly in one type of product or another. Thus, as their potential number of customers, the independent operators, increases, these businesses could get out from under the pressure exerted by the purchasing monopoly of the RZhD and move to a completely different level of profitability. For example, Severstaltrans has gained control over a Kolomensk factory, which holds the monopoly on manufacture of passenger main-line diesel locomotives. The Demikhovsky
Engineering Plant, the only manufacturer of commuter trains in Russia, has become a part of East Line Group. The corporations connected to well-known businessman Iskandar Makhmudov have consolidated a number of the largest assets in the industry, in particular, the monopolist manufacturer of main-line electric trains, Novocherkask Electric Train Factorym, within Transmashkholding Investment and Manufacturing Company. This holding has become the largest private player on the railroad equipment market and the second largest in sales after the state-owned Uralvagonzavod.
Other strategic players soon followed the path forged by the railway machinery sector. For example, the Dedal group of companies announced its plans late last year to unite its affiliated entities, the Vagonmash Train Car Factory and Oktyabrsky Electric Railway-Car Repair Factory, into the Northwestern Train Car Holding. However, Dedal’s management made statements recently that law enforcement agencies are exerting pressure on them. In particular, officials and tax inspectors from the Ministry of Internal Affairs are investigating the operations at one of Dedal’s subsidiaries in its offices located in the suburban Moscow town of Podolsk. In this context, Dedal has forwarded an open letter to Vladimir Ustinov urging the General Public Prosecutor “to investigate what is happening and to punish the negligent police officers, whose actions are causing damage to the holding and its incorporated enterprises.”

Twenty years before the West
Most leading Western manufacturers passed the consolidation stage long ago. In the mid-1980s, each of the industry’s current leaders was just an exclusive supplier to its national railroad. The expansion to the related industries and the markets of other countries resulted in the emergence of a handful of companies controlling 80% of the market.
For example, over the last two decades, the German concern Siemens bought the Swiss company Hani (manufacture of airborne electronics), German Dueweg (tram equipment), Krauss-Maffei’s locomotive division, Austrian Simmering-Graz-Pauker (trucks), Polish Cegeielski (passenger cars and subway cars) and Czech CKD (railroad cars and electric trains).
From 1984 to 2000, the French corporation Alstom acquired three European manufacturers of motorized cars: UK Metcam, French De Dietrich and Italian-Swiss Fiat Ferroviaria as well as Linke Hoffman Bush, a German leader in locomotive engineering, and Polish company Konstal (equipment for tram transport).
Today, the twelve largest suppliers of railroad equipment completely determine the market. Russian companies can enter their ranks in the next few years. In particular, Transmashkholding Company with sales of half a billion dollars plans to earn over a billion in 2006. In this case, it will automatically enter the ranks of the world leaders.
Analysts from SCI Verkehr think that Russian and CIS countries’ manufacturers will also be able to participate in the division of the Eastern European market. Ten Eastern European countries, recently admitted to the European Union, can count on large-scale sponsorship from the EU aimed to modernize railroads within the ISPA (Instrument for Structural Pre-Accession) program. According to an ISPA report, around 37 billion euros will be required to harmonize Eastern European railroads with the EU networks. SCI Verkehr believes that manufacturers from Russia and CIS countries have a substantial competitive advantage on the locomotive market in the Eastern Europe. Locomotive builders from Russia and Ukraine were traditionally very successful on the Eastern European market. Basically, Russian locomotives are not in the slightest degree inferior to foreign counterparts in terms of the price/quality ratio. Thus, for example, General Electric, which planned to participate in modernizing the 2TE10 Russian diesel locomotive, failed to meet RZhD’s strict technical and economic requirements. Instead, railroad officials have decided to use the prototype model 2TE70 made by the Kolomensky Plant. This model, according to RZhD CEO Gennady Fadeev, “completely conforms to the class of the best modern main-line locomotives.” So, Russian locomotives are quite able to compete with Western models in terms of the price/quality ratio. And this is the reason why the Russian market is of no interest to Western players for the time being.
Naturally, a decade and a half of stagnation in the industry had a significant effect on the state of affairs For example, Russian companies are seriously lagging behind their Western rivals when it come to manufacturing electric trains with a powerful rotary-field motor that makes for high speeds. However, these problems are solvable as well, through cooperation with the market leaders (Bombardier and Siemens) when developing products for price-sensitive customers from Eastern European countries.
The Russian companies can also bridge the twenty years’ gap in the transport segment through further consolidation beyond the CIS. Now is the perfect time. The Alstom Group is facing hard times. Because of the problems on the US power machinery market (the group operates in this segment as well), the company saw a net loss of 1.8 billion euros for the last financial year. Today, measures proposed by the French government to ensure the company’s viability are of the utmost importance. As part of these measures Alstom has agreed to is to sell about 10% of its assets within the next few years. Among the businesses earmarked for the sale are, for example, a locomotive plant in Valencia and railroad machinery companies in Australia and New Zealand. Perhaps, it would be worth while for Russian companies to take a close look at the assets on the auction block.

Anna Turulina and Yegor Timofeev assisted in preparing this article. 
    
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