TOKYO -- East Japan Railway, one of the world's largest railway companies, has started operating a railway network in the U.K. with two partners -- its first rail operation outside Japan.
Along with Dutch rail operator Abellio and Japanese trading giant Mitsui & Co., JR East is now running the West Midlands rail network, the first time a Japanese railway company has been involved in running an overseas rail service.
West Midlands Trains, the operating company owned by JR East and its partners, took over the network from the British-French joint venture Govia this month. The consortium won the franchise to run the service for 10 years from the U.K. Department for Transport through a bidding process in August.
Masahiko Nakai, JR East's executive vice president in charge of overseas rail projects, said recognition of the company's capabilities in railway maintenance and operations in the "birthplace of the railway" will give the company's international profile a boost.
With a total length of 899km, the West Midlands railway network links London with Liverpool via Birmingham, where it also operates urban lines. The network carries 73.6 million passengers annually.
The operator will spend 1 billion pounds ($1.33 billion) to gradually replace rolling stock and offer free Wi-Fi and other services in the train cars, according to Abellio UK. It will also create parking areas for bicycles and cars at stations.
The proposal by the Japanese-Dutch consortium includes measures to make cars less crowded and install more helpful direction signs at stations.
There is historical irony in a Japanese company running a U.K. rail service, since Japan's first railways were modeled on the British system, using British financing and engineers. Japan's first rail line opened in 1872 between Tokyo's Shimbashi district and the port city of Yokohama, where there is still a bronze bust on display of British engineer Edmund Morel, who oversaw the project.
In the 1990s, the wheel turned full circle and British officials working on the privatization of state-owned British Rail studied the Japanese experience with public and private railways. The hybrid system that emerged has created an investment opportunity for a Japanese company.
High passenger volumes
JR East will draw on its experience in managing high passenger volumes in Japan, including at the world's busiest station, Tokyo's Shinjuku, through which over 3.6 million passengers pass daily, according to the Guinness Book of World Records. JR East also operates at many of Japan's other busiest stations, including Shibuya, Yokohama and Nagoya.
JR East also plans to take part in the bidding to operate the Southeastern rail network in England.
Created three decades ago through the privatization of Japanese National Railways, JR East is by far the largest railway operator in the world in terms of total distance traveled by paying passengers. The company is also among the world's largest in terms of transport revenue, rivaling Germany's Deutsche Bahn.
JR East set up a section to pursue international business 10 years ago, but has never been involved in overseas railway operations.
According to a Japanese transport ministry forecast, the global railway industry is expected to generate an average of about 24 trillion yen ($211 billion) in business per year in the 2019-2021 period. Of that, operations and maintenance are expected to account for about 9.5 trillion yen. Many new lines will likely be built, especially in the Asia-Pacific region.
Overseas expansion is a key strategic challenge for many Japanese companies facing a shrinking domestic market due to the declining population.
But operating railways is a labor-intensive business and requires continuous investment in equipment and facilities, as well as hefty safety-related costs. For its initial overseas venture, JR East chose a low-risk, low-return project.
Limited but protected
Railway operations in the U.K. do not represent lucrative business opportunities, as profits above a certain level go back to the government. But operations are also protected from heavy losses, as the government guarantees a certain level of earnings with taxpayer money.
As well, the U.K.'s privatization of its railways in the 1990s separated rail network operations from maintenance of tracks and other infrastructure. A separate company owns and maintains the West Midlands' facilities, including stations.
"Since it has local lines, the rail network cannot be characterized as a very profitable business," said JR East President Tetsuro Tomita. "If this is a low-return business, however, it is also a low-risk one, partly because of the separation of operations and maintenance."
JR East's partner, Abellio UK, was established in 2002 by the Dutch state-run railway operator. It has extensive experience in operating railways in the U.K., with a 70.1% stake in West Midlands Trains. It also has the license to operate a suburban London line with Mitsui.
The Japanese trading house is a seasoned partner in JR East's overseas foray, and is also involved in a railway business in Brazil.
Technology and rolling stock
Another major Asian railway operator, Hong Kong's MTR, operated the London Overground for nine years until November 2016. In 2014, it was selected to run London's new Crossrail suburban rail network, soon to be renamed the Elizabeth Line. And in April, it won a $3.3 billion franchise with First Group to run South Western Trains, one of Britain's busiest rail networks.
Yet few overseas railways in densely populated areas offer lucrative business opportunities like those in large Japanese cities. As a result, JR East has focused its international operations on providing technology and rolling stock.
The group's rolling stock company has provided cars for Bangkok's Purple Line, which started operating in August 2016. JR East also won the 10-year contract to provide maintenance services for the line, despite the market being dominated by Siemens and other European players.
JR East is currently in the process of transferring maintenance operations to locally hired employees.
The company is also involved in technological cooperation on a project in India to build a high-speed railway line between Mumbai and Ahmedabad, about 500km to the north. Construction is scheduled to start in 2018 and finish in 2023.