FOR WHOM THE BELL TOLLS – Bombardier Transport

Montréal, 10 November 2014

When Huawei first beat Nortel on a bid, in Siberia, few noticed the warning signs of the paradigm shift. While Nortel was embroiled in accounting scandals, a residual of the telecom and dot com bubble fueled by greed, Huawei grew astonishingly fast in the early 2000s. Huawei’s chairman liked to describe his group’s spirit as a pack of wolves, basically ready to kill. And down went Nortel, distracted and unable to catch up strategically to Huawei. The combination of low production costs, technology, and service levels beyond the reach of Western competitors has propelled Huawei into the top 3 three telecoms manufacturers in the world. Huawei just announced early this Fall that its ambition would now take on the giants of the IT field, namely IBM, HP, etc.

Last 22 October 2014, the bell tolled again. CNR MA Corp, an affiliate of the world’s largest railcar manufacturer (CNR), a Chinese state-owned enterprise, won a bid for the metro of Boston.   The Chinese bid amounted to $570 M, as against a bid of $1080 from Bombardier. The difference is stagerring. However much the details might reconfigure the final costs, the bottom line is that Chinese engineers will do the job, and Chinese workers will build the cars. Assembly will be done in the Boston area. Now Bombardier has done a good business in China for the last 10 years, notably with the Shanghai metro and others. The hidden price was the technology transfer to its local joint-venture partner. The boomerang is coming back a lot faster than expected, now haunting Bombardier. The rail puppy has now grown into a full blown carnivore.

The Massachusetts Bay Transit Authority chose to pocket at least $400M in savings thereby cracking the door open to Chinese competition in public markets. Much will be written about fairness, or not, and for whom. But the writing is on the wall. For equal product technology, the Chinese can scoop up contracts with much lower bids. A few questions however inevitably pop up: How were the Bombardier profits in China recycled, and into what? Has the C-Series gobbled up every scrap of cash flow? What is the state of Bombardier Transport’s competitiveness ahead?

The next battle round will likely take place in Mexico. President Pena has just ordered to reopen the bidding process for a $3.7 B contract for a train linking Mexico city to Queretaro. China Railway Construction led a consortium that initially won the bid. All bets are now open.

The wolves are knocking at the gates. To be continued.

André Du Sault, MBA, MPA