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China lines up merger of top trainmakers
From the Financial Times of Tue, 28 Oct 2014 03:56:47 GMT
A high-speed train travels on the railway to Beijing in Nanning, southern China's Guangxi province on June 13, 2014. Growth in China's industrial output and retail sales accelerated in May, with consumption increasing at its fastest pace since December, official data showed on June 13, in signs of renewed strength in the world's second-largest economy. CHINA OUT AFP PHOTO©AFP

The Chinese government plans to merge its two largest railway equipment manufacturers partly in an effort to win more overseas construction contracts, state media reported.

According to a report on Tuesday in the China Securities Journal, China CNR and CSR Corp will be reorganised into a single entity – more than a decade after the two were split off from the China National Railway Locomotive and Rolling Stock Industry Corp to promote competition in the sector.

However, the two companies have since been criticised for competing against each other to secure high-profile overseas contracts, often with both losing out on bids.

If merged, they would have combined revenues of more than $32bn and a 118,000-strong workforce.

CNR Corp, China’s largest Hong Kong listed railway equipment manufacturer by revenues, reported net profit of Rmb4.2bn ($677m) last year and sales of $15.7bn.

Reports that CNR and CSR would be rejoined first surfaced in September, when financial magazine Caixin said China’s state-assets administrator was discussing their consolidation. At the time, both companies said they were unaware of any merger plans.

In an announcement on Monday evening, CNR and CSR said they were working on “major issues” and would issue a more detailed statement by the end of the week. They had suspended their shares from trading earlier in the day and were not immediately available for comment.

Speculation about the two companies’ future comes on the cusp of what Yang Song and Joel Ying, Barclays analysts, call a potential “sea change in the competitive landscape of the rolling stock industry”.

Last week, CNR secured China’s first ever US contract – a $567m deal to supply at least 284 railway cars to Boston’s subway system. Under the agreement, CNR will invest $60m and create 250 jobs in a final assembly plant in western Massachusetts.

In the final round of the tender CNR beat high-profile international competitors including Bombardier, Hyundai-Rotem and Kawasaki Rail Car. But in a development highlighting some of the domestic criticism about competition between the two Chinese rail companies, CSR was eliminated after Massachusetts transport officials ruled that the technical, manufacturing and quality assurance components of its bid were “unacceptable”.

The breakthrough agreement also attracted considerable controversy in Massachusetts.

In the run-up to the contract, prominent dissidents, including a former student leader of the 1989 Tiananmen Square protests, testified about China’s human rights record. In his official announcement of the award, Duval Patrick, Massachusetts governor, did not mention that CNR was a Chinese company.

In a much more significant tender for China’s export ambitions, CNR and CSR have reportedly entered separate bids to construct what would be the first high-speed rail project in the US – a $68bn, 1,300km line linking San Francisco and Los Angeles that is slated for completion by 2028.

The contract calls for an initial delivery of 95 trains – less than half of CSR’s current annual manufacturing output.

China has built the world’s largest high speed rail network over the past five years, but CNR and CSR’s export ambitions have been hampered by quality concerns following a 2011 crash in eastern China in which 40 people died.

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