Over the next decade 55 new metro lines totalling more than 1000 km are due to be built in 20 Chinese cities. The scale of work and the demand for advanced technology are opening up many opportunities for western suppliers and their local partners

John Clark, Strategic Marketing Director, Westinghouse Rail Systems Ltd

CHINA'S metro market is booming. Today over 55% of the country's population lives in cities. There are 43 cities with a population of over 1 million, of which 24 have more than 2 million. Chinese car ownership has risen to 2·3 million vehicles, and this number is forecast to spiral upwards exponentially, with the risk of widespread gridlock unless the planned expansion of metros takes place.

Look at the rate of development so far. In the 20 years to 1989, China built just three lines totalling 50 km - two in Beijing and one in Tianjin. The following 15 years saw the construction of 17 metro or light rail lines in 10 cities, with more than 250route-km opening in the past decade. This expansion has been driven by Shanghai and Guangzhou, which have built up considerable experience in metro construction.

Today, there are nine more lines under construction, totalling 220 km, and five cities have been granted approval for their first lines, marked by a series of groundbreaking ceremonies at the end of December. By 2010, a further 35 projects are expected to get underway, bringing the total length of metro and light rail line in China to between 1200 and 1500route-km (Table I).

This next phase of growth can be divided into four categories:

  • Beijing, Tianjin, Shanghai and Guangzhou already have extensive networks and are planning rapid expansion in the short term, driven by the 2008 Olympics in Beijing, the 2010 World Expo in Shanghai and the 2010 Asian Games in Guangzhou.
  • Shenzhen, Wuhan and Nanjing have completed at least one line each and are now starting their next projects.
  • Hangzhou, Shenyang, Chengdu, Harbin and Suzhou have received approval to start work on their first metro or light rail lines.
  • A further 30 cities have prepared plans for metro or light rail networks which could eventually extend to 10 lines or more.

The State Council intends to give priority to those cities with a population of more than 3 million and GDP greater than 10bn yuan, beginning with routes where the ridership is projected at more than 30000 passengers per hour in each direction.

The rapid growth has attracted many international suppliers into the market, leading to increased competition. At the same time the Chinese customers are becoming increasingly sophisticated, expecting more and more functionality within the tight restrictions of available funding. There is also an increased requirement for 'localisation' through partnerships or joint ventures with Chinese firms.

A signal success

Westinghouse Rail Systems has been active in the Chinese metro market since 1989, when it was appointed as sub-contractor to Balfour Beatty in a UK-funded upgrading of Beijing Line 1. Since then, we have won a steady flow of medium-sized contracts to supply overseas signalling technology to Beijing Metro, maintaining a 100% market share. We have also won a major contract in neighbouring Tianjin.

Current tenders specify a partnership between a 'substantial' Chinese company with signalling experience and an overseas partner. This can be a joint consortium or a Chinese main contractor and an overseas subcontractor. In either case, the overseas partner is expected to take overall system responsibility. Some authorities are trying to establish a list of qualified Chinese bidders, but this is still under debate by policy makers.

Some forthcoming tenders envisage the signalling installation as well as supply being included as part of a turnkey contract. Chinese tendering law requires at least three bidders, and also says that one Chinese company cannot be in more than one consortium, so the limited number of experienced signalling installers may present a problem in putting this concept into practice.

Further complexity comes with the changing relationships between customer and owner. Until recently, the end-user was simple to identify. The metro company was responsible to the city government for both construction and operation, with finance co-ordinated through the city. The Director and his team were responsible to the Mayor for everything, including procurement, often using a Design Institute to develop the system specification and appointing a committee of specialists to evaluate the tenders.

Inevitably, things have become more complicated in recent years. In Beijing and Shanghai, construction and operation have been separated into different companies, to permit the possibility of introducing competition between operators. More importantly from a procurement perspective, finance is coming from new sources, and the 'end-user' sometimes includes private investors. More than one piper calls the tune, which makes the agreement of specifications and evaluation of tenders more complex.

Evaluating the priorities

In any Chinese metro tender, the key requirements are Price, Technical and Localisation. One recent project specified at the ITT stage that the evaluation criteria would be marked on Price 30%, Commercial 10%, Technical 55%, and Localisation 5%.

The scoring formula for price is highly innovative, excluding the high bidder, and marking the others against a benchmark close to the average for the rest, with the lowest tenderer also being penalised. Also being used for traction procurement, this philosophy seeks to prevent suppliers from winning tenders with unrealistically low prices and then demanding increases later. So although 30% of the evaluation is against price, the marking rules mean that in reality the spread between bidders is not great.

The technical evaluation has the highest number of marks, and this is inevitably more subjective. In some ways the market is focused on fashion than function, with technology dominating the debate ahead of other important factors such as on-time delivery record, in-service reliability and maintenance costs. Hopefully, when the Chinese market matures there will be a return to functional specifications, leaving the suppliers to propose the best technology.

At just 5%, the localisation score looks low, but the percentage of localisation to be included is mandatory - and usually 60% for signalling.

Localisation has been a major government policy for technologies where China has not had a mature indigenous capability. Metros failing to comply with the requirements can be penalised by having import concessions disallowed, or by the withholding of approval for future projects. Although localisation inevitably reduces the value of contracts to overseas bidders, it is a condition of working in this market, and some of the lost profit opportunity can be restored by licence arrangements.

The rules are based on the value of manufactured goods, although recently there have been moves to include service elements, such as engineering and software. Because hardware manufacture is generally more expensive outside China, the rule limits still further what can actually be supplied from overseas; however this is eligible for import tariff exemption, which does not apply to engineering services.

WRSL has achieved successful localisation, notably through a long and strong co-operation with the Beijing Dacheng Communication & Signal Co, which has won praise from the government's localisation auditor, the China Communications & Transportation Association.

The requirement for the overseas technology company to undertake full system responsibility puts the onus on the supplier to ensure that its Chinese partners or subcontractors can meet the responsibility. Similarly, where technology transfer involves advanced designs, a considerable degree of trust is essential.

There are also significant cost benefits in the localisation of engineering services, even though these are not currently included in the assessment. WRSL has been vigorously training local staff with excellent results. This has the added benefit of improved product support, as the staff are 'close to customer' - not only geographically, but also linguistically and culturally.

Working across cultures

The understanding of cultural differences is crucial to successful work in China. Trust, honesty and keeping of promises are the most important aspects of a relationship between colleagues.

The most obvious difference between China and the western world is the language, which presents practical problems in terms of fitting time for translation (both ways) into the tendering timescale. This is further complicated by the different language structure, and by a different numbering system. Face-to-face contact is very important, and there is a very important distinction between formal and informal meetings.

Behavioural differences go back thousands of years, and as well as recent influences such as the Cultural Revolution there are strong regional variations. The Chinese are quite private in their business affairs, and the importance of trust is paramount. Chinese companies generally have a vertical decision-making structure, and are not always comfortable dealing with a western business that shares responsibility for a project between members of a team, for example.

Good relationships take time to develop, but once established they are very valuable. Our success in Beijing is in no small part due to the quality of communication and steady progress in trust and understanding. I cannot say that there have not been problems, but a good meeting of minds and a genuine desire to work in partnership has assured a successful outcome.

As the Chinese rail market expands, and more and more western companies establish a foothold in the region, I believe there will be convergence with international procurement, safety and even interoperability standards. This could pave the way for longer-term partnerships and even long-term supply agreements with metro authorities to replace the one-off nature of the current procurement regime.

Table I. Urban mass transit systems in mainland China

City System Existing Length Under construction Lines lines km or planned planned

Beijing Metro 4 114 252 km by 2008, 693 km by 2020 22

Shanghai Metro 4 90 218 km by 2010, 780 km planned 17

Guangzhou Metro 2 42 190 km by 2010, 555 km planned 14

Shenzhen Metro 2 23 293 km by 2015, 363 km planned 13

Tianjin Metro 1 45 153 km by 2015, 235 km planned 9

Nanjing Metro 1 24 44 km by 2010, 433 km planned 14

Dalian Light Rail 1 47 95 km by 2010 7

Wuhan Light Rail 1 10 70 km by 2010, 220 km planned 7

Chongqing Monorail 1 28 96 km by 2010, 300 km by 2020 7

Changchun Light Rail 1 16 52 km planned 3

Chengdu Metro - - 16 km by 2010, 54 km by 2015 7

Hangzhou Metro - - 82 km by 2010, 278 km planned 8

Shenyang Metro - - 22 km by 2010, 183 km planned 5

Harbin Metro - - 46 km by 2015, 143 km planned 7

Xi'an Metro - - 50 km by 2015, 252 km planned 6

Qingdao Light Rail - - 195 km planned 8

Suzhou Light Rail - - 25 km by 2010, 180 km by 2020 8

Zhengzhou Light Rail - - 25 km by 2015 6

Shijiazhuang Light Rail - - 150 km planned 5

Dongguan Light Rail 200 km planned 4

Source: Parsons Brinckerhoff/Shenzhen Metro Co

  • CAPTION: Westrace central processor and object controllers for the Tianjin metro were tested by WRSC's Chinese partner before installation
  • CAPTION: Face-to-face meetings are important to establish a good working relationship between international suppliers and their Chinese partners
  • CAPTION: WRSL has supplied ATP, ATO and train detection equipment for the recently-modernised Line 1 in Tianjin