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Rolling stock merger highlights China's rail ambitions

CNR builds high-speed trains using technologies supplied by Siemens at this plant in Tangshan.

BEIJING -- China's two biggest makers of rail cars officially greenlighted a merger in shareholders meetings Monday, aiming to use state support and sheer scale to expand the new company's presence abroad.

     The deal between China CNR and CSR is part of the nation's ambition to become a major player in the global rail car industry.

     The press was shut out of CSR's shareholders meeting at a hotel in Beijing. While the session lasted only 40 minutes, it was enough to thrill retail investors.

     "I welcome it," said one man from Hong Kong who left the venue looking excited. "This will let the company compete with rivals in industrialized countries."

     President Xi Jinping's administration has been encouraging overseas investment. This policy is heavily reflected in the merger, which, according to a top CSR official, could wrap up in April if all goes well.

     The new company will employ 170,000 and is expected to log annual revenue of roughly 200 billion yuan ($31.9 billion) -- nearly four times that of the rail business of Canada's Bombardier. It will dwarf other competitors as well.

     The domestic market accounts for about 90% of the combined sales of CNR and CSR. A merger would let the new company use its scale to gain an edge over industry leaders in Japan, the U.S. and Europe.

     CNR is in talks to bring high-speed rail to 28 countries, according to Vice President Yu Weiping. It has shown an interest in projects in industrialized countries for which Hitachi and Kawasaki Heavy Industries are also looking to win orders.

Imported know-how

Since last year, government officials from South America and Africa have been coming to tour a CNR plant in Tangshan, Hebei Province. A security team is stationed at the facility.

     The 2.3 million-sq.-meter site makes rolling stock using technology supplied by Germany's Siemens. CNR is automating its sheet metal processing lines, pushing workers for millimeter-level precision in machining aluminum car bodies. A Siemens official was recently surprised by the level of quality on display, according to CNR.

     CNR has acquired expertise from France's Alstom as well, while CSR has partnered with and picked up know-how from Kawasaki Heavy and Bombardier. The merger brings these advanced technologies under one roof, according to a CSR official. The new company will also work on in-house production of such key parts as drive and control systems components, for which CNR and CSR have been relying on exports.

     Since China started operating high-speed rail in 2007, it has extended its network to 16,000km, with the government speeding the process along by taking a leading role. Its widely varying climate has allowed the country to accumulate considerable technical expertise, according to an official at a major Japanese company.

A united front

Last October, CNR announced a contract for subway trains in the U.S. city of Boston. While Kawasaki Heavy and Bombardier had also bid for the project, the price offered by the Chinese company was reportedly nearly half those of its rivals.

     But cost was not the only factor in the decision. Chinese government officials sat in on the negotiations, repeatedly stressing that the offer was aimed at strengthening relations between Beijing and the U.S., and that the company would build plants for local production. While manufacturing in the U.S., with its high labor costs, would undoubtedly narrow CNR's margins, official state backing proved to be a powerful weapon.

     CNR and CSR have been competing abroad since they ramped up overseas expansion in 2010, creating a vicious cycle that cut into profitability. The merger aims to end this wasteful battle and allow China's rail industry to push forward abroad as a single entity.

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