Over the past three months, the international press has broadly debated on a potential merger of the rail activities of the two big companies, Siemens and Bombardier.
Although rivals, the two manufacturers of rolling stock and rail systems are considering this possibility as a solution to facing and overcoming the more and more fierce competition coming from China, more precisely from the Chinese rolling stock manufacturer China Railway Rolling Stock Corporation (CRRC).
This manufacturer is state-owned and was established in 2015 through the merger of two important Chinese rolling stock manufacturers, CSR and CNR. Consequently, CRRC could easily sign international contracts having had the capacity of fully financing the awarded contracts.
The final objective of the negotiations between Siemens and Bombardier is the establishment of a new joint entity comprising the rolling stock manufacturing divisions (cars and locomotives), train control systems, as well as urban transport divisions (metro and trams).
The measure could prove to be rather sensitive. With joint incomes of nearly EUR 15 billion (USD 16.8 billion), the two companies could become a stronger balance for the Chinese state-owned company, CRRC, which had annual sales of over EUR 32 billion and is already successfully selling its rail technology in the developing countries of South-East Asia and Middle East, while recently accessing the US market as well.
Quoted by Reuters, Joe Kaeser, director of the German corporation Siemens, said a partnership for major rail contracts was a potential alternative to merger. “We can work together, it doesn’t have to be a major decision of mergers and acquisitions”, said Joe Kaeser, refusing to directly confirm negotiations with Bombardier, writes Reuters.
According to the international press, the proposed joint venture, estimated at over EUR 10 billion (USD 10.6 billion) could be established this year, but would lead to layoffs in an industry already affected by job loss.
In June, Siemens announced layoffs or relocation of 2,700 jobs, a decision motivated by its efforts to upgrade IT operations and boost efficiency. Almost 1,700 jobs will be cut in Germany over the next years, while other 1,000 jobs will be relocated.
Bombardier’s operations in Germany amount to 8,500 employees, but it is soon expected that the company’s Board would approve a cut in the number of employees, affecting approximately 2,700 people.
However, there are more hindrances that Siemens and Bombardier must overcome before reaching a final agreement. According to international sources, quoted by the press, it was not yet decided who – the Germans from Siemens or the Canadians from Bombardier – would have the final say. Moreover, Bombardier is dealing with a difficult restructuring process, although the recently upgraded credit rating proves the procedure is working.
Despite the market’s positive answer, the restructuring weakens the Canadians’ force in negotiating with Siemens and their financial outcome doesn’t help too much either. Siemens has 27,000 employees in its Mobility Division and its sales are EUR 1 billion above those of Bombardier, resulting in significantly higher profits.
Societe Generale analysts have recently evaluated Siemens’ Mobility Division to around EUR 7.2 billion, while Veritas Investment Research Corp appreciates that the 70% share held by Bombardier in the Transport Division values at least EUR 5 billion.
It is also important to mention that last year, Bombardier and CRRC announced their intention of joining their forces for international tenders, but it has not happened.
By combining their rail divisions, Siemens and Bombardier will manage to diminish the pressure of the Chinese competition which expands globally threatening the market share of the two companies. However, the merger will have to be thoroughly reviewed by antitrust authorities and it is even possible that unions will strongly oppose.
Moreover, the measure is not an easy one to apply without serious consequences in the European rail industry. The establishment of such a strong, important joint venture would surely affect the activity of the other European rolling stock manufacturers.
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