Changing Conditions And Industry Response - Rail and Urban Guided Transit Equipment Sector Competitiveness Framework

Sector Competitiveness Frameworks Series
Rail and Urban Guided Transit Equipment
Overview and Prospects

• Foreword
• Highlights
• Key Points about this Industry
• Changing Conditions and Industry Response
• Growth Prospects for the Industry
• Annexes

Introduction

The Canadian rail and GUTsector is generally well positioned to respond to rapid globalization, and in particular to freer trade within North America. Current strengths developed as older firms adjusted quickly to changing conditions while newer firms patterned their growth according to emerging market conditions. Continual global market change requires ongoing adjustment.

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Investment and Financing

In recent years, new investment in Canada has generally been focussed on upgrading existing plants and equipment, rather than on purchasing new. Bombardier has made major investments in the United States and in European and Asian countries, in some cases to circumvent non-tariff and other barriers, while at the same time establishing a presence in key markets.

Major new financing will also be required to meet new environmental standards in the United States market, both for Canadian railways operating in this market and for equipment exporters.

Government financing and export insurance play a large role in the international rail and GUTmarkets. Most industrialized countries provide concessional financing to their respective industries in order to help cover risk exposure and to win export contracts that create jobs and expand production in their countries. Export financing institutions include the United States' Eximbank, France's Coface, the United Kingdom's Export Credits Guarantee Department ECGDand Canada's Export Development Corporation EDC.

Export financing is especially important for large turnkey projects, where Canadian consortia often lack the financial depth of their international competitors. European and Japanese consortia are usually very large and can more easily obtain required financing and performance bonding. Because of the high risks involved, Canadian financial institutions have been reluctant to participate in these projects.

The EDChas played a significant role in export financing for Canadian companies, but the levels of assistance in many cases are still lower than those provided to international competitors. Financing amounts and terms are an important factor in sales to developing countries.

The availability of financing from the EDC and from the Canadian International Development AgencyCIDA to developing countries in the early 1980s made Canada the leading exporter of locomotives in the world. However, in recent years, CIDA priorities have changed, and the availability of soft financing to developing nations has been reduced. The Canadian Commercial Corporation CCC has also assisted in Canadian exports by facilitating foreign contracting and bonding requirements.

More recently, Canadian companies such as Bombardier and SNC Lavalin have been able to arrange financing through international consortia formed to bid on large urban transit projects.

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Trade

Access to markets large enough to allow economies of scale in both production and development is key to the industry's future. Since the Canadian market is too small for these purposes, the industry must achieve critical mass through export sales. To export successfully, Canadian firms must continue to develop and maintain a combination of system design capability, technological expertise, competitive prices, reliable and high-quality products, project management competence, and the financial strength to bid and participate in large-scale projects.

Non-tariff barriers, especially government procurement policies, significantly impede Canadian exports to developed countries. European and Japanese markets are particularly difficult to penetrate.

The main non-tariff barriers in the United States market are the "Buy America" provisions of the United States. Intermodal Surface Transportation Efficiency Act and similar state and local content or assembly requirements. Transit authorities receiving United States federal government funding must ensure that 60 percent of rolling stock content value is sourced in the United States, as well as final assembly. All non-rolling stock equipment must be entirely sourced in the United States. Waivers, though possible, are exceptional. Domestic procurement is also legislated for Amtrak, the United States national passenger rail corporation.

In response, some Canadian firms ship semi-finished product from Canada to final assembly facilities in the United States. To some extent, the new United States plants mean overcapacity, disrupted manufacturing sequences and added costs, as well as investment shifted out of Canada. Examples are Bombardier's Barre, Vermont, final assembly facility and its new 100 000-square-foot (9300 square metre) plant in Plattsburgh, New York, built to finish rail and subway cars for New York City. GUT DDGMis also constructing a final assembly plant in Schenectady, New York.

The 60-percent United States content requirement is hardest on Canadian component suppliers, mostly small and medium-sized firms, as it discourages investment in Canadian (R&D)and plants, and diverts parts production to the United States In turn, some Canadian parts suppliers have set up United States plants or transferred production to American affiliates or parents. Foreign investors also prefer to locate in the United States to ensure access to the entire North American market.

The absence of a "Buy Canadian" policy and the tariff elimination under the FTA means that United States manufacturers have much freer access to Canadian markets. Several United States firms have started to move aggressively into the Canadian market, for instance, to supply steel wheels for rail cars.

Major Canadian firms with final assembly plants in the United States and new sourcing patterns are no longer seeking elimination of American procurement policies. They would prefer reciprocal national treatment, similar to the 1965 Canada-United States Automotive Products Agreement (Auto Pact) and the defence industry's production sharing agreements. The Canadian industry through the CUTA's Transit Suppliers Business Council has sought to move its counterpart, the American Public Transit Association, in this direction.

Despite the non-tariff barriers described above, Canadian firms have done relatively well in the circumstances. This performance could undoubtedly be improved if fewer barriers existed.

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Technological Change

To remain competitive with advancing transport technologies, Canadian firms must stay abreast of fast-breaking innovations. Many Canadian companies have a good record in acquiring and developing innovative products and technologies, through means such as joint ventures, licensing, acquisitions and in-house R&D.

In the GUT subsector, Canadian firms are technically competitive and, in some respects, world leaders. Bombardier invests about 3 percent of its revenues in transport (R&D), and has received a number of public and private sector contracts to develop new vehicle prototypes.

Bombardier's cars for the Chunnel shuttle, which links England and France beneath the English Channel, include onboard computerized monitoring and control networks, and a range of innovative lightweight, durable materials used in the aerospace industry.

Other Bombardier transit innovations include reduced-weight bodies for a train prototype being tested by the New York Transit Authority, and the first North American-produced bogie that can run effectively at 240 kilometres per hour for Amtrak's northeastern high-speed rail corridor.

Bombardier's Transportation Systems Division designs, integrates and delivers a total transportation package through a turnkey or project management approach. The Transportation Systems Division has set up Advanced Rapid Transit ART, a fully automated and driverless transit train, in three major North American cities. ARTART delivers lower operating and maintenance costs and the best on-time performance in the industry.

In locomotive manufacturing, DDGMDDGM's major (R&D) is performed in the United States. Along with its partner Siemens, DDGMDDGM was first in North America with a commercially successful AC traction freight locomotive, a new generation of high-power locomotive. Three 4400-horsepower AC locomotives are capable of the work of five 3000-horsepower DC units.

A number of dynamic components firms have proprietary technology, such as advanced train controls, communications systems and vehicle monitoring systems.

Innotermodal Inc. has developed a unique technology that allows truck trailers, with slight modifications, to be operated on train tracks for intermodal transportation. The system requires no special infrastructure and minimal equipment. The system is designed for short to medium distance hauls of 1500 kilometres or less, and is being tested between Drummondville, Quebec, and Mississauga, Ontario, by a CNsubsidiary, Ecorail, in partnership with truck carriers.

CP Rail and a United States rail company, CSX Intermodal, are also developing a new intermodal system, the Iron Highway, which consists of a 400-metre train with special locomotives at each end. It targets short hauls in the range of 500 to 1100 kilometres. The train splits in the middle and lowers a ramp used to drive trailers onto the train's flatcars. CP will be testing two Iron Highway trains between Toronto and Montreal, while CSX Intermodal will test two trains on its Chicago-Detroit line. Electro-pneumatic braking for freight trains is an important new safety development.

High-speed rail HSR refers to passenger rail transport travelling at speeds over 153 kilometres per hour. As speed rises, the technology becomes more complex, and tracks need to be on a dedicated, grade-separated roadbed. Maintenance demands become more exacting and construction costs increase significantly.

Since the 1980s, VIA Rail, Bombardier and governments have been studying HSR. A 1995 joint federal-provincial study reported that an HSR system on the Quebec-Windsor corridor would cost about $18.3 billion for the 300-kilometre-per-hour technology, and $16.4 billion for the 200-kilometre-per-hour system. Current fiscal restraint will make HSR difficult in Canada,at least in the medium term. However, opportunities exist for Canadian participation in the numerous United States corridors that have been proposed.

In early 1996, Bombardier was announced as a member of two separate HSR consortia: the first for the Florida Overland Express FOX (overall project value United States $4.8 billion), and the second for the United States Amtrak northeast corridor (United States$611 million for rolling stock).

Despite these announcements, the timing of future HSRprojects remains uncertain, primarily because of government debt loads. Alternative financing, including significant private sector investment, will be required. VIA Rail and Amtrak themselves are facing further subsidy cutbacks and have limited resources to contribute to HSR.

Intelligent Transportation Systems ITS refers to the application of computer technologies, communications and electronics to improve safety, efficiency and productivity of surface transportation systems as well as to reduce environmental impacts. In time, ITS will transform the entire surface transportation sector, including private motor vehicle, mass transit and railroad systems, emergency vehicles and trucking. Current ITS products include satellite-based vehicle location and communication systems, computerized transit management systems, electronic toll collection systems, and in-vehicle route guidance and advanced freeway management systems.

ITS is an emerging sector whose opportunities for Canadian companies are significant. Some observers estimate that the world market for this emerging sector could reach $1 trillion over the next 25 years.

Major United States., European and Japanese firms appear to be committing more resources to product development than their Canadian counterparts. Their large size and significant market access give them a greater base to amortize large (R&D)expenditures, which allow them to sell more competitively into other markets. Canadian producers are disadvantaged by the fact that the Canadian market is too small to support high (R&D)R&D investment. In addition, most major competitors are supported by favourable domestic procurement policies and (R&D) assistance.

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Human Resources

As with Canadian manufacturing overall, skills training to keep pace with technological change is paramount. Upgrading worker skills is key for the GUTsector in achieving greater productivity and competitiveness.

Sustainable Development

In keeping with the 1990 United States Clean Air Act and in cooperation with locomotive builders and the AAR, the United States EPA is developing new emission standards for locomotives and other off-road mobile emission sources. These are likely to be in place by the year 2000. The new standards are meant to achieve maximum reduction of diesel locomotive emissions through new technology, with due consideration to associated costs, noise, energy and safety factors. In theUnited States, both railroads and major diesel locomotive manufacturers now are working on technologies to meet these standards.

The new standards are expected to take a two-tiered approach, with the first tier applying to the current locomotive fleet and units built up to 2004. The principal objective of the first tier will be a 50-percent reduction of nitrogen oxide NOx emissions for newly manufactured locomotives. Second-tier regulations will apply to locomotives built after 2004 and will require a 65-percent reduction in NOx as well as some reduction in particle emissions.

Canadian railway companies such as CN and CP that do business in the United States will be required to comply with EPA environmental standards as they apply to United States railroads. Since CN and CP have much older fleets than United States companies, replacement and rebuilding costs to meet the new standards will be very high. For Canadian suppliers, the new standards create opportunities to take part in developing new environmental technologies and equipment.

Faced with the worst air quality in the United States, southern California is applying new emission reduction measures well ahead of the EPA deadline. Since more than just a cleaner diesel may be required, other approaches are being considered including alternate fuels, in particular liquefied natural gas (LNG).

For the longer term, southern California is examining the feasibility of fuel cell technology (FCT) to power electric trains in the Los Angeles basin. FCT could provide near-zero emissions and quieter operations.