INTRO: In the midst of turmoil, the railway supply industry is trying to change the rules of the game. Andrew F Saxe* reviews the performance of the major players over the last 12 months

In a dramatic year for the railway supply industry, two of the major suppliers reported large losses, three CEOs of the big four companies left the scene, one company announced a complete reorganisation, and another ascended as the industry’s new number one. More important, however, was the industry’s passionate embrace of modular designs and maintenance as the way forward.

The entire focus of the industry has changed over this past year from relentless concentration to new sources of revenue and new ways of doing business. The decade-old acquisition game finally wound down. Alstom made a few carefully-selected purchases such as Sasib and De Dietrich, while Bombardier Transportation took a breather after digesting Deutsche Waggonbau AG. Adtranz made no noteworthy purchases, and Siemens Verkehrstechnik engaged in some tidying-up, raising its share of Matra Transport in France and selling its locomotive facility in Kiel.

Why the sudden sobriety? Both Adtranz and Siemens fell deeper into the red in 1998. Siemens VT lost a hefty DM759m (387m euros), resulting in the resignation of CEO Wolfram Martinsen. Losses at Adtranz widened to an estimated 360m euros, prompting DaimlerChrysler to replace Kaare Vagner with Rolf Eckrodt. To spur the turnaround, DaimlerChrysler took sole control of Adtranz by buying out ABB’s 50% share at the end of 1998. Both Siemens and Adtranz have promised corporate parents they will be in the black in 2000, which means another year of losses in 1999. Both suppliers realise patience is wearing thin at corporate headquarters.

Contrasting fortunes

The troubles of these mainly German-based manufacturers contrast with their Francophone counterparts. Bombardier integrated DWA, increased revenues by 76% and maintained a respectable 5% profitability. Although CEO André Navarri also resigned during the year, Alstom lifted revenue to 3·5bn euros and operating profit to 6% of sales, making it the industry’s largest and one of its most profitable companies.

Defenders of Siemens and Adtranz mostly blame their difficulties on the 30 to 40% collapse in prices in Germany and elsewhere in the early 1990s. They acknowledge that DWA also suffered from falling prices, but play down DWA’s return to profitability in 1997 by noting that federal subsidies helped absorb the nearly DM850m in operating losses it incurred between 1994 and 1996. In contrast, Siemens and Adtranz had to pay the full cost of every closed facility and laid-off worker as the industry tried to cut back on excess capacity.

Some advocates of the German producers also explain away the superior performance of Bombardier Transportation and Alstom Transport by claiming both of them benefit from higher prices in their home markets of North America and France. This explanation, however, has gradually lost some of its validity. Certainly, Bombardier dominates in North America, but in the absence of a major domestic manufacturer, the United States has become a competitive free-for-all for Japanese and European suppliers. Bombardier was fought tooth and nail in 1998 by Kawasaki for the large New York City Transit contract, and in 1999 by Alstom for the potentially larger Long Island Rail Road EMU order.

Critics of Alstom quickly note that outside France the company does less well, losing money in Spain and only breaking-even in Germany (where in fact Linke-Hofmann-Busch has steadily improved its results in recent years). The French market is however becoming more competitive and the huge TGV orders have subsided significantly. Alstom is finding that in Great Britain, Spain, and even France it is facing stiffer competition for each new EMU, metro or LRV order.

To be fair, executives at Siemens and Adtranz have been frank about their own mistakes, including above all the rapid rate of acquisitions taking them into new markets and activities that stretched the attention and capabilities of management, causing them to lose oversight and control of costs. In contrast, Alstom grew much less rapidly. Similarly, Bombardier’s growth until the DWA acquisition was more modest and more narrowly-focused on the purchase of other mechanical manufacturers, allowing it to focus on its core competence.

Lessons for success

The better numbers at Bombardier and Alstom are also a result of the things they have done right, and they serve as important lessons for the rest of the industry. Analysis of Bombardier projects shows that the company prefers to bid on contracts with large volumes. Let Siemens and CAF battle for a few LRVs in Sacramento, Bombardier pours its energies into 1000-car orders for New York and Long Island Rail Road. Bombardier does not avoid small orders, but it appears to choose projects carefully with an eye towards enhancing the company’s already stellar stock performance. Prestige projects or market share seem to take a back seat to shareholder value at the Canadian manufacturer.

Alstom’s superior performance is the result of many factors, but the company must be credited with aggressively responding to the foreseen decline of TGV orders by pursuing maintenance contracts to the point where they now contribute a reported 20% of revenue. Contracts covering both the supply and maintenance of rolling stock allow a manufacturer to reap the benefits of designing trains for easier and cheaper upkeep, providing a powerful incentive to achieve lower life-cycle costs. Alstom has also sought to enhance the quality, speed and cost-effectiveness of their maintenance and part replacement operations, through such innovations as PartsLink.

Can these two basic strategies be replicated by other suppliers? Right now it seems that Adtranz and Siemens are pursuing tried and true restructuring policies. Both have announced significant job cuts in Germany - 1 400 for Adtranz and 500 for Siemens at Duewag alone. Siemens has also announced a programme called ’VTOffensive’ to improve project management, procurement and other processes. Besides restructuring, Adtranz has also laid out a bold new direction as well. It is being proactive by rolling out a complete range of modular designs and is structuring its entire organisation around these product groups.

Modular solution

Simply copying Bombardier’s focus on large contracts is not possible in a world of few 1000-car orders and many 100, 50 or even 30-car orders. Modular design is a way to capture some of the cost benefits of large orders by keeping roughly 70% of the train the same and adapting the remainder for individual orders. Modularity offers suppliers a way to reduce development costs which had risen, in the example of LHB, from a modest 1% of revenue in 1991-92 when the designs still came from German Railway, to 12·4% by 1997-98. DWA’s research and development costs had climbed to 8% by 1997, and as early as 1996 Adtranz said it was spending 10% on R&D.

In the recent past several suppliers have introduced modular designs, such as the Combino LRV from Siemens and the Citadis from Alstom, but no-one else has extended this concept to the entire product range like Adtranz. Nor have they insisted that for smaller orders they will offer the modular design only.

Time will tell whether a supplier can be so strict with customers. Alstom enjoyed tremendous success selling the same basic TGV technology in France, Belgium, Britain, Spain, and Korea. Nonetheless, in the USA, when it was clear that Amtrak would not build a true high-speed line, Alstom was willing to make radical changes to the TGV design rather than leave the field to Adtranz or Siemens. Until now industry has always changed the design to close the deal, and it is unclear whether this pattern can be broken.

Maintenance challenge

Both Siemens and Adtranz have indicated they will try to emulate Alstom and pursue maintenance contracts, but again Adtranz is out in front. According to Adtranz, maintenance has exploded as a business segment. The number of vehicles maintained privately has risen from 2000 in 1992 to 10000 today, of which Adtranz accounts for 1100. Siemens’ maintenance activities are more modest. Bombardier hopes to earn 5 to 10% of its revenue from maintenance, and to this end the Acela and Virgin CrossCountry contracts (RG 4.99 p223) were important wins.

While maintenance promises to be fertile ground for (hopefully) profitable revenue growth, it also presents real challenges. In order to correctly diagnose problems and accurately predict obsolescence, suppliers must establish reliable access to customers’ data through the Internet where possible. As maintenance contracts are often based upon vehicle availability, suppliers must also radically reduce downtime, which means creating a fast and reliable parts delivery system for their own components as well as those made by other suppliers. This requires major changes to the supply chain. Maximising part availability also reinforces the demand for modular designs, so that parts can be shared among the greatest possible number of train types. Finally, the supplier must manage the often highly-sensitive labour issues involved in transferring maintenance from a typically unionised workforce to a private contractor.

This past year has shown that the industry is responding to harsh pressures to increase revenue and reduce costs. Yet in its response, the industry creates a new challenge for itself - simply managing the complexity of its organisational structures as it assumes new risks. Consider the developments over this decade. From local manufacturers of discrete products, the major suppliers have become multinational systems integrators, now responsible for the design and maintenance of trains as well as the financing and project management of new lines and turnkey systems.

These new tasks demand a broad spectrum of skills and disciplines. As suppliers develop their maintenance businesses, they will also multiply the number of facilities to manage far beyond their limited number of manufacturing sites. And as we go into the next century the question for suppliers is whether they are able to manage profitably complex, multi-disciplinary, multinational organisations. If the industry was once about designing and building the best trains, it is now about developing the best people who can handle this kind of management challenge.

TABLE: Year Revenue Earnings Revenue before tax* per employee

euro m % of sales euro 000

Alstom 1998-99 3 516 6·0% 140

LHB 1998-99 210 4·1% 108

Adtranz 1998 3 270 -11·0% 137

Siemens 1997-98 2 564 -15·2% 206

Duewag 1997-98 303 -48·5% 109

Bombardier 1998-99 1 639 5·0% 115

CAF 1998 280 4·0% 100

* Except Alstom and Adtranz, which report operating profit

TABLE: Adtranz Siemens Alstom Bombardier Italians Japanese Russians 1 Chinese 2 Other

High Speed 11 7 40 14 13 12 - - 3

Metros 18 6 19 17 2 18 6 - 14

LRVs 15 20 10 14 6 5 13 - 17

EMU/DMU 22 11 16 15 2 11 5 - 18

Commuter 7 3 4 60 1 7 - - 18

Inter-city coaches 3 1 - 18 - - 7 65 6

Locomotives 3 8 7 6 - 2 No data No data 48 29

1 Data on Russian production of LRVsand metros included for first time. Data on inter-city coaches corrected

2 Data on Chinese production of inter-city coaches and locomotives included for first time

3 Of which General Electric Transportation Systems 10% and General Motors EMD 12% (19% and 23% respectively before Chinese production included)

CAPTION: New boys in town. In the last year three of the four biggest rail industry suppliers have appointed new Presidents &CEOs. From left to right: Michel Moreau of Alstom Transport, Rolf Eckrodt of Adtranz (now officially DaimlerChrysler Rail Systems) and Herbert Steffen of Siemens Verkehrstechnik

CAPTION: Carefully targeting the big orders in a bid to grow revenue and profits, Jean Yves Leblanc continues to head the fast-growing Bombardier Transportation

* Andrew Saxe is an executive with Andersen Consulting’s Automotive, Industrial & Transportation Group, and a regular commentator on the world’s railway supply industry. He can be contacted in Boston on +1 617 454 4372