I came across an article in yesterday’s New York Times Business section, China Is Eager to Bring High-Speed Rail Expertise to the U.S. which I feel raises a rather interesting sourcing dilemma for governmental officials in California.  For readers who may not be aware, the State of California has plans to build a high-speed passenger train link between the cities of Los Angeles and San Francisco.  This massive project is in its planning phases, and the Times article notes that nearly 150 years after American railroads utilized Chinese laborers to build rail lines across the U.S. Western region, the Chinese government has signed preliminary cooperation agreements with the State of California and General Electric to be a potential bidder for construction of this initial high speed rail corridor.

This poses an interesting dilemma for California officials from two perspectives.  First, China’s rail ministry has been gaining worldwide attention for its engineering competence and reputation for overall speed in building high speed rail networks.  The ministry has undertaken and completed massive high speed rail construction within mainland China, and begun projects in Saudi Arabia, Turkey and Venezuela as well. Second, China’s ministry can compete on the basis of low cost through its leveraging of massive economies of scale in engineering, labor and construction equipment resources.  China has chosen to partner with General Electric to license its technology, and the preliminary agreement calls for GE to source at least 80 percent of locomotive and system control equipment among U.S. suppliers. China would source the remaining 20 percent, license its technology, supply engineers and is even willing to help finance the construction utilizing some of its $2.4 trillion in foreign reserves.

No doubt, the State of California can explore other alternatives including proven expertise from suppliers in France, Germany and Japan. A little over a year ago, Supply Chain Matters provided our commentary noting the reality that the U.S. is very late in competency to build intercity high-speed rail networks, and building a world-class line would have to have some dependence on a more experienced non-U.S. partner. if you need to build a world-class network infrastructure on an aggressive timeline, go to the experts who have the most experience in on-time delivery or operation of such a network. We also called attention to the opportunities for economies of scale, since the technology and supply chains for both the track infrastructure as well as these trains already exist. 

The State of California now faces a complex sourcing decision unlike many faced by other supply chain sourcing professionals. The China alternative presents strong positives in overall cost, competency and long-term financing, but may present rather dicey political sensitivities.  GE also does not have any track record per se in producing high-speed electric locomotives. Other proposals from France, Germany or Japan could bring proven locomotive, engineering and equipment expertise, but may not be able to match the cost advantage of China.  An interesting dilemma, to say the least, one that may require utilization of rather sophisticated project sourcing weighting expertise.  Then again, when governments are involved, political forces can never be ignored.

What’s your advice to the State of California?  Low cost, proven expertise or source for maximum American jobs and technology transfer?

 Bob Ferrari

 One of the provisions of the recently enacted U.S. economic stimulus plan calls for a long overdue investment in a high-speed intercity rail network linking major U.S. cities or commerce hubs.  The legislation allocates $8 billion in capital to build high speed rail corridors, and the Obama Administration further wants to invest $1 billion a year, over the next five years in continuing investments.  In my view, this investment is long overdue, and I applaud U.S. legislators for passing this portion of the plan.  But I would also hasten to add that there are lessons in supply and value-chain management that U.S. planners need to quickly take into account. Don’t recreate the mistakes and wasteful spending of the past.

The U.S. is very late to the game of intercity high-speed rail networks.  If you’ve had the opportunity to travel in Japan, Europe, or China, you know what I mean.  When Amtrak, the U.S. intercity rail provider invested in its Acela high-speed trains several years ago to service the northeast U.S. rail corridor, the progress was painfully slow and yielded too much compromise. For budgetary reasons, the existing rail infrastructure was retrofitted to try to run high-speed trains on existing tracks that were originally built for other purposes, in some areas not ever able to support high-speed.  Trains had to be specially designed to run on this patched network, and the first design flaw turned out to be premature cracked wheel assemblies.  When initially put into service, these trains could hardly be called “high-speed” and acceptance by travelers was painfully slow.  Since that time, speeds have improved a bit, but nothing even resembling other high-speed networks that exist in other countries.  Yet remarkably, the  percentage of air/rail travelers in the northeast U.S. corridor has grown from 12%, to over 50% today for Acela trains.

Lesson one- if your transportation network needs to be based on high-speed and safety, invest first in a network design infrastructure that can support these requirements on day one.  Also, being late to the game has one advantage, that being your ability to benchmark others who have been successful in building such networks.

The U.S. is not alone in incorporating high-speed rail investments in a stimulus plan.  China has already begun its deployment of these networks, and continues to execute on this plan to create the largest high-speed rail network in the world.  Last week, Siemens inked a $1 billion dollar deal to build 100 new high-speed trains for China. This was the fifth contract for Siemens in China. The latest contract calls for  trains will be the world’s longest single high-speed units, incorporating 16 cars and carrying over 1000 passengers over 218 miles-per-hour.  Siemens is not alone in this expertise, and is joined by France’s SNCF, who just happened to be touring the U.S. last week, expressing keen interest to build and run a U.S. high-speed rail network. 

This brings us lesson two- if you need to build a world-class network infrastructure on an aggressive timeline, go to the experts who have the most experience in on-time delivery or operation of such a network. Once more, there are opportunities for economies of scale, since the technology and supply chains for both the track infrastructure as well as these trains already exist.

And what about economic stimulus and job creation? The latest Siemens contract calls for component parts assembled in German, Austrian and Chinese factories, and final trains assembled in China.  There is no reason why U.S. network planners cannot stipulate that certain infrastructure and train components be assembled in U.S. factories, along with final assembly.  Quickly reinvigorating factories in the U.S. Midwest or West could well be the prime objective.

That brings lesson three- management decisions are either motivated by the pragmatic facts, political environment, or both. 

So what’s your view?  Should the U.S. try to invest from scratch in high-speed trains, along with supporting value- chains, or transfer existing technology for the sake of speed and time-to-operation?  Can the U.S. replicate this technology in a timely fashion?

Bob Ferrari