Price Dispute Shows How China’s High-Speed Train Market Has Gone Off the Rails
(Beijing) — China’s main railway operator is demanding the nation’s top railway equipment-maker slash its prices on the next generation of high-speed trains.
The demand for lower prices highlights an unusual battle between two major state-run companies, both of which are vying to boost profitability in the era of state-owned enterprise (SOE) reform.
The demand by China Railway Corp. (CRC) has upset another state-owned giant, CRRC Corp. Ltd., its major equipment supplier, several sources at the two companies told Caixin.
The dispute means China’s new generation of high-speed trains, dubbed Fuxing, will be sold at a price as low as 130 million yuan ($19.25 million) per unit. In comparison, the price of Fuxing’s predecessor in 2016 was 170 million yuan per unit.
CRC has sound reasons for negotiating hard with manufacturer CRRC over the prices of the new trains, said a source at CRC who asked to remain anonymous because he was not authorized to speak publicly.
CRC’s argument is that it should receive a sizeable discount because it owns the intellectual property rights in the core components of the Fuxing train, the source said. It also believes, based on CRC’s own monitoring of raw-material prices, that CRRC isn’t offering a reasonable price.
A source at CRRC, however, argued that cutting prices for CRC “doesn’t make sense in any case” because the Fuxing train costs much more to build than its previous generation of high-speed train, the CRH380.
CRRC’s view is that the train is worth the higher price. For example, the Fuxing has a 30-year service life — 10 years longer than its predecessor — said the source at CRRC, who was not authorized to speak publicly. It has also been comprehensively upgraded to provide better service equipment, greater safety and more comfort to passengers.
Caixin sent both CRRC and CRC requests for a cost breakdown of the Fuxing train, but neither replied by the time of publication.
Out of balance
From 2010 to 2015, CRC got CRRC to lower by 3% to 5% the price of the high-speed trains it bought annually. In 2010, CRC paid 200 million yuan for each CRH380. In 2013, CRC paid 187 million yuan per train. By 2015, the price was down to 170 million yuan.
Considering CRC’s strong bargaining position, it is highly likely that the company will win a 20% price cut, a source at CRRC’s Qingdao-based subsidiary told Caixin.
CRRC has been leaning on its suppliers to lower costs. At the beginning of 2017, it hosted a meeting with suppliers where it demanded that they offer deep discounts of their own, said the source from CRRC Qingdao Sifang. The suppliers were not happy with the demand.
“The steepest acceptable price cut is 2%. If the price goes lower than that, we can’t do it,” said one supplier who did not wish to be named for fear of losing business.
CRC has had a lot of bargaining power in previous negotiations because it was the sole buyer facing off against four of CRRC’s core subsidiaries, each competing for its business.
CRRC underwent a transformation under China’s SOE reform — a plan seeking to change the way the government controls SOEs by running them according to market principles. The Hong Kong- and Shanghai-listed CRRC has granted four of its subsidiaries the freedom to vie for orders independently.
In contrast, CRC has remained more or less a monopoly. It doesn’t allow its 18 units to contact suppliers on their own, and it often bargains with each supplier itself to win orders.
CRC’s own reforms halted in 2013. If it also allowed its units to independently participate in bids, the market for high-speed trains would snap back into balance, said Zhao Jian, a professor at the School of Economics and Management at Beijing Jiaotong University.
The dispute over prices underlines the complicated relationship between the two state-owned giants, which are highly interdependent but fiercely competitive.
CRRC’s largest customer has always been either CRC or its predecessor, the Ministry of Railways. In 2016, sales to CRC accounted for 46% of CRRC’s total sales revenue. At times, that figure has been as high as 70%.
The two companies have been engaged in several disputes over the last few years as each has struggled to remain profitable while complying with government directives to become more independent and market-oriented.
One major dispute has involved Fuxing’s intellectual property rights. Negotiations in 2015 between CRC and CRRC — the two key players in the development of Fuxing trains — over the train’s intellectual property were mired in disputes in 2015. CRRC eventually gave in after CRC threatened to stop buying its trains.
Meanwhile, the two companies are both under enormous pressure to make a profit. For years, CRC has been struggling with massive debt. After the company was spun off from the now-defunct Ministry of Railways in 2013, its debt grew from 2.66 trillion yuan to 4.72 trillion yuan as of the first quarter of 2017.
As for CRRC, its annual net profit fell 4% year-on-year to 11.3 billion yuan in 2016 and is forecast to decline 20% to 30% in the first quarter of 2017 due to declining prices for high-speed trains, said the source at CRRC.
CRRC’s high-speed train unit is the single largest source of its profits, accounting for about 90% of the total, the source said.
The government needs to step in to resolve the conflict between the two monopolies, said Cui Changlin, a researcher at the China Society of Economic Reform. Regarding the dispute over the cost of the trains, for example, the bureau of commodity prices could get involved to determine whether CRRC’s train prices are reasonable.
Contact reporter Song Shiqing (email@example.com)
- 1In Depth: The Shadowy Businessman Behind a Multibillion-Dollar Bank Swindle
- 2European Demand for Chinese Solar Panels Soars as Russia Withholds Natural Gas
- 3Cover Story: The Double Squeeze on China’s ‘Sandwich Generation’
- 4Covid Quarantine Bus Crash Kills 27 in Guizhou Province
- 5Distressed Chinese Developers Scramble for a Piece of $28.5 Billion Industry Bailout
- 1Power To The People: Pintec Serves A Booming Consumer Class
- 2Largest hotel group in Europe accepts UnionPay
- 3UnionPay mobile QuickPass debuts in Hong Kong
- 4UnionPay International launches premium catering privilege U Dining Collection
- 5UnionPay International’s U Plan has covered over 1600 stores overseas