Top train makers to merge

By Yang Jing and Chu Daye Source:Global Times Published: 2014-12-31 0:43:21

CSR to absorb CNR shares in Shanghai and Hong Kong

China's two top train makers announced late Tuesday a merger worth 160 billion yuan ($25.79 billion) as China consolidates its assets to facilitate the export of its advanced high-speed train technologies.

The China South Locomotive & Rolling Stock Corporation Limited (commonly known as CSR) will absorb the shares of the China CNR Corporation in Shanghai and Hong Kong via a share conversion scheme, and CNR will be delisted from the two bourses, according to announcements released by the two companies on the websites of the Shanghai and Hong Kong stock exchanges.

Under the deal, CSR will issue shares to CNR's shareholders, with a swap ratio of one CNR share for 1.1 CSR share.

Trading in shares of CNR and CSR has been suspended since October 27, pending announcements by the two companies on "significant asset restructuring."

Trading will restart on Wednesday.

"The merger will impact the headquarters level rather than their subsidiaries and factories," Wang Mengshu, a rail industry expert and member of the Chinese Academy of Engineering, told the Global Times Tuesday.

After the merger, China will be unbeatable in the global market for high-speed rail, Wang said.

In 2000, the China National Railway Locomotive & Rolling Stock Industry Corp was split into two parts which became CNR and CSR, to better adapt to market trends and encourage competition.

Since then, CNR and CSR have served largely pre-defined regional markets separated by the Yangtze River.

Experts say that CSR and CNR are administrative institutions encompassing a vast cluster of locomotive manufacturing plants, research institutes and support units.

However, Wang believes that the past several years have proved that the split did not achieve its goals.

The two train makers have had to compete with each other domestically and globally, with the pressure pushing them into price wars or even bribery, according to Wang.

In 2011, a bidding war broke out between the two companies in Turkey. CNR offered a quotation of $1.2 million per car, compared to CSR's original $2 million per-car quote. CSR then pushed its price further down, but the order was eventually given to a South Korean company.

In 2013, another bidding war broke out over locomotive orders in Argentina, when CSR undercut the orders originally secured by CNR with an extremely low bid.

Experts said that the relatively limited market for high-speed trains makes one leading company per country enough.

Tian Yun, chief editor of China Macroeconomic Information Network, pointed out that the merger will avoid the awkward situation whereby some deals were won at prices below profit-making levels.

"As these companies strive to make it up in their balance sheet, domestic consumers end up picking up the check," Tian said.

But he warned that the merger could create other problems, such as an industry monopoly.

Intensified monitoring should be applied to the operations and financial reporting of the super-company born out of the merger, to avoid a pricing monopoly and keep costs in check, Tian said. 

The merger between CNR and CSR has raised expectations for possible mergers in other heavy export industries China, such as nuclear energy and infrastructure building.

"Japan has set a good example in this regard. Its three major automakers - Toyota, Nissan and Honda -don't eat into each other but fight in a largely coordinated fashion under a price alliance," Tian said.

Wang, the rail industry expert, also mentioned that, unlike CSR and CNR, competitors from other countries usually put forward one national representative for a project bid after internal negotiations.

"What matters after all is that the export is profitable," Tian said, noting that currently a majority of Chinese companies' overseas businesses are losing money.

Currently, the market values of CSR and CNR on the Shanghai stock market are about 80 billion yuan and 79 billion yuan, respectively.

The two rail giants have been making steady progress in their drive to open markets overseas.

CNR said on October 23 on its website that it had been awarded a contract from Massachusetts to build 284 trains for the country's oldest subway system.

On November 3, a consortium including China Railway Construction Corp, China CSR Corp and several Mexican construction companies won the contract to build a 210-kilometer high-speed train line connecting Mexico City and the industrial hub of Queretaro.

However, the deal was scrapped by the Mexican government only days later over public concerns about the legitimacy and transparency of the bidding process.

Posted in: Industries

blog comments powered by Disqus