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Chinese train maker CRRC to take over German factory

Deal comes as US Congress moves to block funding for company orders

CRRC Zhuzhou Locomotive's deal to buy a German train factory will give it an important foothold in Europe at a time it is facing scrutiny over its operations in the US.   © AP

HAMBURG, Germany -- CRRC, the Chinese state company that is the world's largest train maker, is set to gain a key foothold in Europe by acquiring its first locomotive factory on the continent through a deal with German manufacturer Vossloh.

The deal comes as CRRC is under pressure in the U.S. where it has opened two factories and won contracts to supply train cars for transit systems in several major American cities. Both houses of Congress have passed measures that would bar the use of federal funds to buy Chinese rail cars and buses out of concern they could be utilized for Chinese espionage or sabotage. It is not yet clear if the final version of the bill to which the ban has been attached will ultimately include it.

Vossloh announced Monday that it would sell a locomotive factory it opened last year to CRRC Zhuzhou Locomotive, a subsidiary of Hong Kong-listed CRRC. The German company, which is narrowing its focus to railway infrastructure equipment, said it expected to initially receive a figure in the "low single-digit millions of euros", and another 10 million euros ($11 million) in follow-on transactions, under its agreement with CRRC Zhuzhou.

"CRRC is the very strong partner needed for our future development and the deal is supported by management and workers, as well as their union," a Vossloh spokesman said. "In view of this robust support, we are confident that all regulatory approvals will be gained by the end of the year."

A spokeswoman for CRRC was unable to immediately confirm the agreement. Vossloh, which has an existing joint venture with a unit of China Railway Construction, had originally put its investment in the locomotive factory at 30 million euros.

It is unclear how much scrutiny the deal will face in Germany, although industry observers do not expect there will be regulatory action against the deal.

"Vossloh does diesel locomotives for short distances, which is a shrinking market segment, as opposed to electric locomotives, which is a growing segment," said Maria Leenen, founder of railway consultancy SCI. "Given that there is no key technology involved, I don't see how the foreign trade law could be used to stop the deal," she added.

Nevertheless, the German government has taken a wary stance toward Chinese buyouts since Chinese appliance maker Midea bought robot manufacturer Kuka for 4.6 billion euros in 2016.

The government has since adopted measures giving it more power to block certain buyouts on public interest grounds. The government is also considering a plan to create a state fund that could outbid Chinese state companies trying to buy key assets.

CRRC Zhuzhou was outbid by local investors in 2016 when it tried to acquire Czech Republic-based train maker Skoda Transportation.

CRRC last year generated profits of 13 billion yuan ($1.8 billion) on revenues of 214.52 billion yuan. More than 90% of revenues came from China, with Europe accounting for just 7.57 billion yuan, mainly from sales of auto parts and deep-sea robots. Among its highest profile sales in Europe has been an order received last year from German rail operator Deutsche Bahn for four small shunting locomotives to be delivered in 2021.

The acquisition of Vossloh's business should give CRRC's European growth ambitions a significant boost as EU regulations effectively favor domestic producers, according to Klaus Holocher, a professor for transportation management at Germany's Jade University of Applied Sciences. "If a Chinese company acquires a domestic player, they get all the standards and technology required to bring its trains quicker onto European railway tracks," he said.

This in turn would make CRRC a stronger rival to Germany's Siemens and France's Alstom, who earlier sought to combine their train businesses to thwart CRRC from grabbing European orders. The European Commission in January forbade the two companies from merging their train businesses to protect competition.

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