PARIS -- French train maker Alstom is set to take over a railway unit of Canada's Bombardier in an $8.2 billion deal intended to give it the scale to better compete with China's CRRC, the global market leader.
The memorandum of understanding announced Monday marries Alstom's strength in high-speed rail with Bombardier's competitive advantage in subways and urban transit. The new Alstom will be the world's No. 2 rolling-stock manufacturer, with revenue of around 15.5 billion euros ($16.8 billion).
But it will remain behind China's state-owned CRRC, which reported the equivalent of well over $20 billion from relevant segments for 2018 and has been hungry to expand its presence on the turf of companies like Alstom and Bombardier.
CRRC, born in a 2015 megamerger between the southern and northern rolling-stock manufacturers of China, has made failed plays for European peers, including talks with the Czech Republic's Skoda Transportation. It landed what appears to be its first European order last year, a bid to supply light-rail cars and maintenance service in Portugal.
CRRC has been winning more major rail projects in Africa and Asia, regions participating in China's Belt and Road cross-border infrastructure initiative. Its success in Africa has alarmed Alstom, which counts that market as a key domain.
Growth in developing economies and increased environmental awareness are seen driving a shift to mass transit. The global rail supply market will grow at a 2.7% annual clip to reach 192 billion euros in 2023, European industry group UNIFE has projected.
Alstom and Germany's Siemens, currently the No. 3 and No. 2 players, announced in 2017 a merger of train operations. But the deal fell apart last year after running into resistance from European Union antitrust authorities. The offer for fourth-ranked Bombardier may face lower regulatory hurdles.
Alstom said it will spend 5.8 billion to 6.2 billion euros for all of Bombardier Transportation. Enterprise value, which includes debt, comes to around 7.45 billion euros, or $8.2 billion, according to Bombardier. The merger is slated to close by June 2021, following regulatory approval.
The expanded organization will realize 400 million euros in cost savings in the fourth to fifth year, mainly in parts procurement. For Bombardier, burdened with more than $9 billion in debt, the proceeds will go toward improving finances and allowing the company to focus on business jets.
Seventh-ranked train manufacturer Hitachi was once floated as a candidate to take over Bombardier rail assets. But the Japanese company was not keen on pursuing the acquisition.
"What needs investment right now is IT," Hitachi President Toshiaki Higashihara has said.
Now such Japanese players as Hitachi, which have pursued partnerships with larger American and European players to compensate for lack of scale, find themselves at risk of being squeezed out.
Hitachi and Bombardier have submitted a joint bid to produce train cars for the U.K.'s High Speed Two rail project, but the Alstom-Bombardier deal will reduce the need for a Japanese partner.
"We may go head to head with American and European competitors," an executive at a Japanese train car manufacturer said. "The strategy will have to be revised."
Additional reporting by Sora Takahashi in New York and Annu Nishioka in Tokyo.