INTRO: Andrew F Saxe* takes an incisive look at the performance of the major railway suppliers in the last year
WHEN IT rains it pours. The railway supply industry was still slogging through another year of restructuring when news broke on June 3 of the catastrophic ICE accident at Eschede in north Germany, apparently caused by a broken wheel. This tragedy will have a profound impact on maintenance practices, testing, and the manufacture of key components. It may even affect how contracts are divvied up between multiple bidders. But even if the industry resolves all the questions arising from Eschede, it will still be confronted with the challenge of forging a profitable future.
The industry, dominated by Adtranz, Siemens Verkehrstechnik, and Alstom Transport (previously GEC Alsthom Transport), has developed along familiar lines in the past year - voracious acquisitions coupled with weak results - but it also took important steps to return to profitability.
After this columnist warned last summer that acquisitions represented the lure of the Lorelei, the major suppliers undertook additional takeovers (proving again that advice given freely is never heeded). Adtranz bought Schindler’s rail operations, Alstom and Siemens Verkehrstechnik snapped up Polish manufacturers Konstal and Ciegelski respectively, and Alstom took over Amerail’s Hornell facility in New York, after acquiring the rolling stock activities of Canada’s AMF the year before. For its part, Bombardier took a minority position in Elin, the Austrian traction manufacturer and, most importantly, bought Deutsche Waggonbau AG outright for DM626m (Ecu318m).
At the same time profitability for each of the ’big three’ deteriorated in 1997 (Table I).
ABB and AEG had merged their rail suppliers to form Adtranz in the teeth of huge overcapacity in Europe and prices in Germany that had fallen by 30 to 50%. The modest profit posted in 1996 seemed to dispel early predictions of difficulties (RG 2.96 p85) until last autumn when Adtranz made public its intention to cut 20% of its 25000 workers worldwide, with 1800 out of 7800 jobs disappearing in Germany alone. Though the original 5000 figure was later cut to 3600, Daimler-Benz and ABB proceeded to boost Adtranz’s equity by Ecu325m in preparation for an Ecu144m restructuring charge. Finally, the company reported it had swung from an Ecu129m operating profit in 1996 to a 1997 loss of Ecu195m. It predicted a return to the black in 1998.
Siemens Verkehrstechnik too had warned of earnings problems, citing low prices and continuing restructuring costs. It stated early on that it expected a loss of DM95m (Ecu48m) for 1996-97. By February the company announced the loss was a hefty DM177m (Ecu90m), and, unlike Adtranz, it was expecting another loss in 1997-98 of around DM70m (Ecu35m).
Alstom’s prospectus for going public prepared for its stock flotation of June 22 showed that profit at its Transport division had been climbing from 5·6% of net sales in 1995-96 to 5·9% in 1996-97 when, just this past year, profit slid to 4·4%. This was despite a healthy jump in sales, and despite the very profitable French operations (Table II). Cost overruns for projects in Great Britain and Spain, as well as cancellation of a British contract, were blamed for the weakening results.
Mixed picture elsewhere
Other major players presented a mixed picture. After Finmeccanica took the long awaited step of fully acquiring mechanical manufacturer Breda to combine it with Ansaldo, it seemed a fourth systems integrator might be in the making. Then the parent company quadrupled its 1996 loss of Ecu250m in 1997. Talks of mergers or sales to various candidates are apparently under way.
1997, however, was kind to Bombardier and DWA. Despite flat sales, Bombardier got past write-downs of Eurotunnel shares and loss-making contracts in Belgium and Austria to boost results from 3·9% to 5% of sales. The 20% jump in DWA’s 1997 revenues helped swing the company from an operating loss of -14·2% in 1996 to an operating profit of 4·5%.
Two points are notable in DWA’s turnround. First, although its exports and restructuring had been financed with state assistance, the 1997 numbers are relatively free of extraordinary items. Second, whereas the former Kombinat once relied on the Eastern bloc for more than 80% of its revenues, in 1997 it drew only 1% of sales from Russia and 6% from eastern Europe.
Performance discrepancy
So what does this all mean? Why are the major suppliers struggling while the large mechanical manufacturers, Bombardier and DWA, now one company, have been able to improve their performance?
There are numerous legitimate explanations for differing results. Special factors are always noted. The German government subsidised DWA’s massive restructuring and that company still benefits from the slightly cheaper east German workforce. DWA could counter that it completely refocused after the collapse of the Russian market, closed its Dessau plant, shed over 15000 workers since 1991, and boosted productivity from Ecu64000 per worker to 133000 in 1997. During the same period Alstom’s Linke-Hofmann-Busch went from Ecu86000 sales per employee in 1991 to 107000 in 1997.
As for Bombardier, industry commentators often note, with some justification, that it benefits from more lucrative North American contracts. As an example, it is receiving just under US$2m a car for bi-level commuter cars for Seattle. DWA received less than DM2m for its double-deck commuter cars for German Railway. Depending on exchange rates, that represents a premium of 30 to 40% in price in North America, although US and Canadian workers are noticeably less expensive than Germans. Once exposed to European prices and costs, as last year showed, Bombardier also got stung. Outsiders are now waiting to see how its European operations will digest the Ecu1·3bn Virgin CrossCountry contract.
Bombardier could respond that it faces real and growing competition in North America. It may have won the American Flyer contract from Amtrak, the huge New York City subway order, the JFK light rail line, Vancouver Skytrain, and follow-on orders for the Toronto subway, but Siemens dominates in the light rail sector. Adtranz is becoming more active again, and Alstom’s acquisition of Hornell in New York, and AMF in Canada, places it squarely in this market. Bombardier has lost money in the past, showing it is not immune to the industry’s problems, but it has battled back to better returns.
Profits elusive
While industry insiders can debate these points, there is another major issue too. Being profitable as a systems integrator has proven unexpectedly difficult.
At the start of this decade, GEC-Alsthom, ABB, AEG and Siemens all set out to develop into suppliers of ’complete solutions’ by becoming ’systems integrators’. The one-time electrical component suppliers bought up dozens of independent mechanical manufacturers, signalling companies, passenger information specialists, and locomotive builders in a burst of vertical and horizontal integration. They could offer the entire range of products, from different types of railcars, to traction, to signalling, to power distribution and generation, to project financing and management. The systems integrators can now build entire systems: lines, signalling, rolling stock, locomotives, power generators, catenary, everything. And they now often contract to maintain what they deliver.
But can they do so profitably? Consider the task they set themselves. They had to master complex engineering skills as railways stopped designing their own trains and started demanding innovative and fully integrated, and now fully tested, systems and rolling stock. They had to master new skills such as financing and project management. And they had the constant effort of integrating new companies, with different skills, cultures, and IT systems, and, very often, different languages. At the same time they developed a worldwide sales presence, far outstripping US and Japanese competitors. By growing so rapidly, they guaranteed management would be stretched to the limit.
Bombardier has grown by acquisition as well, but it has followed a different strategy. The company was a mechanical manufacturer, and it bought other mechanical manufacturers: BN in Belgium, BWS in Austria, Talbot and DWA in Germany. It has no signalling capability, nor power distribution and generation. Elin offers some but not comprehensive skills in traction. As a result, Bombardier can focus on core skills in different geographical regions. In contrast, the systems integrators had to master multiple skills throughout the globe while managing painful restructuring in their home markets.
Modular products cut costs
The big three have taken an important step this year to guarantee a more profitable future. They are striving to develop fully modular designs for rolling stock, in which up to 80% of the design is standard, and the rest can be customised at modest cost for different buyers. Siemens has already had some success with its Combino modular light rail car. Adtranz has invested Ecu200m in developmnet of its ’Modular Product Platforms’ for nearly its entire product range (RG 5.98 p343), borrowing heavily from Daimler-Benz’s expertise in automotive platforms to do so.
The goal of this programme is to cut down on design and development costs, standardise products, share components, and cut total production costs by 30%. In a fundamental way the systems integrators are trying to manage the complexity that comes from offering ’complete solutions’ to customers. Offering everything, tailor-made, to each customer, has been a recipe for red ink. They have taken an important step in correcting that strategy.
It is an open question whether moves such as this will bring about the turnaround needed. Overcapacity is still rife in the industry. Greater productivity will actually generate more overcapacity in Europe as European demand has slowed. Announcing expected cost savings invites further pressure from railways and city operators to share in new savings, when the strategy is actually designed to make up for the last fall in prices. And price competition in every market, whether in Poland, Spain or the US, is becoming more intense.
Yet the integrators are tackling their core problems. They are cutting capacity and trying to manage complexity through flexible standardisation. If they can concentrate on these tasks and resist the Sirens’ call for further expansion, the numbers may be significantly better next year. o
CAPTION: Competitors in search of profits. Dr Wolfram Martinsen of Siemens (left) and André Navarri of Alstom hoped to close their contract for high-speed trains in Taiwan last month
CAPTION: * Andrew Saxe is an executive with Andersen Consulting’s Transportation & Travel Services group, and a regular commentator on the world’s railway supply industry.
He can be contacted in Boston on +1 617 454 4372
Table I. Key financial results of
selected railway suppliers
TABLE: Year Revenue Earnings Revenue before tax* per employee
Ecu m % of sales Ecu 000
Adtranz 1997 3 309 -5·9% 132
Siemens 1996-97 2 095 -4·3% 169
Duewag 1996-97 323 -1·0% 127
Alstom 1997-98 3 017 4·4% 137
Alstom France 1996-97 1 065 10·7% n/a
LHB 1996-97 196 3·6% 102
Bombardier 1997-98 1 078 5·0% 142
DWA 1997 566 4·5% 133
CAF 1997 263 4·4% 87
* Except Adtranz, which reports operating profit
Table II. Market share of mechanical work for orders placed since 1990 (%)
TABLE: Vehicles built Adtranz 1 Siemens Alstom Bombardier 2 Italians Japanese Other
High Speed 11 000 10 13 44 7 13 11 3
Metros 14 700 15 6 22 13 4 16 24
LRVs 11 850 20 26 12 15 5 4 17
EMU/DMU 25 400 19 11 15 13 2 9 31
Commuter 3 600 4 3 4 55 1 8 25
Locomotives 7 800 18 9 11 - 3 n/a 59 3
1 Schindler’s orders have been integrated with Adtranz
2 DWA’s orders have been integrated with Bombardier
3 Of which General Electric Transportation Systems 22%, General Motors EMD 22%, and other firms 15%
’Offering everything, tailor-made, to each customer, has been a recipe for red ink’
Andrew Saxe
