I just stumbled over the presentation on Slide Share that Alistair Dormer has apparently given on October 5th for middle-east clients. Looking briefly at the Slides I reflected a bit on what has happened for Hitachi Rail in 2015, here are some thoughts:
Hitachi poised to grow overseas
The Hitachi group with over 300’000 employees and annual sales of over 80 billion USD is very strong in its home base in Japan. Even though the rail business remains to be a minor part of the company with about 1.4 billion USD in sales, it is still very prominent within the company.
Traditionally, Hitachi Rail was very active in Japan, China and South East Asia with the overseas business accounting for slightly above 30% of turnover. I assume that the component business in China was a major contributor for that.
Among other reasons due to the demographic development in Japan, the Japanese railway market will rather saturate then grow. At the same time competition is increasing as JR East and other operators seek actively suppliers from Europe, for instance during the roadshow these weeks. The needed redevelopment after Fukushima has for the corporate somewhat lessened that problem, for the rail business it remains however to be of significant importance.
At the same time, the Chinese market sees increased competition in the so far high margin component business, resulting eventually in smaller profits coming from the China business.
Hitachi did its analysis and understood that there will be an increased demand in Europe, especially the UK with its electrification program requiring infrastructure investments and new rolling stock. Why in particular the UK is very attractive for Japanese companies is that their project set-up with PPPs allows also major capital investments from pension funds and the corporate with reasonable interests to diversify their portfolio.
Is Hitachi Rail as part of the Hitachi Conglomerate a benefit?
I am still unclear if the Hitachi Conglomerate is a benefit for Hitachi Rail or not.
Benefits include that, Hitachi Rail can offer its product portfolio as part of the City Development approach Hitachi, Siemens, Toshiba and possibly Samsung can provide. But business demand for turn-key cities remains low so far
Furthermore, the financial backing of the group allows nonorganic growth without high interest burden, so Hitachi can stay in the current and ongoing consolidation game.
Disadvantages are mainly the disability to adapt dynamically to the changing market environment, the inability to make pragmatic alliances with e.g. Siemens, ABB and others on a project basis and the Japanese culture favoring seniority over capabilities.
To grow Hitachi further outside of the corporate mother, it was apparently necessary to move abroad. The acquisition of Ansaldo has cemented that move and made Hitachi Rail probably the business unit with the most global footprint within the group.
Takeover of Ansaldo Breda and Ansaldo STS
When it was announced in February 2015 that Hitachi would take over Ansaldo STS and Ansaldo Breda, I was briefly surprised given that the Breda part of the company is suffering from a few unsuccessful projects in Europe, mainly the IC-4 in Denmark and Fyria in the Netherlands/Belgium. At the same time, Bombardier commenced to collaborate strongly with Breda for the ETR 1000. Having learnt in the meantime, that in the deal between Hitachi and Finmeccanica, the liabilities will remain with the later, an acquisition of Ansaldo can make a lot of sense to expand their overseas business.
What is happening after the takeover?
- Hitachi Rail’s turnover practically doubles
- The product portfolio expands significantly
- The customer base expands significantly in Europe and the USA
- The local footprint expands significantly
What are the challenges?
While other companies have decided for the “system integrator” approach to cater the demand for large PPPs and BOT projects, Hitachi follows with Ansaldo more of a “system house” of turn-key solutions approach. Whether Hitachi will be able to align the business models between the “system integrator” Ansaldo and the “system house” will have to been seen.
Cultural integration of the strong Italian team into the group now that more than half of the workforce of Hitachi Rail works in Italy. At the same time, a certain independence of should be maintained so that Hitachi Rail can access the African and Middle-Eastern markets through its Italian subsidiaries.
And now what to do next?
We can be certain that the consolidation game will remain to be going on, a Vossloh could bring in the Diesel locomotive capabilities that Hitachi Rail is still lacking. Paired with the Japanese financing and efficiency a competitor for the EMD/GE duopoly in the accessible market could be interesting.
Leveraging the global sales force with the new company’s product portfolio will be the next key step. Especially the US metro and LRV market could be interesting given that Hitachi Rail now fulfills the buy America requirements.
Bring in more modern technology such as SiC inverters into Ansaldo’s products, at the same time optimize their design of rolling stock according to Japanese efficiency in maintainability and customer friendliness. (I recently had the chance to ride an Ansaldo LRV in the US, it was instantly clear that the design resembles a 1980s design even though it was built less than 15 years ago.)
Utilizing the Ansaldo STS automated signaling product and the wireless power supply technology paired with Hitachi super-caps could be an interesting offering for cities interested in gradually removing overhead catenary systems.
Hitachi Rail needs to go into the African market due to demographic development. The cities are growing rapidly while the transport infrastructure within the metropolitan regions but also outside cannot keep pace with the development. Currently it appears that newer financing instruments enable large projects on the continent.
Finally, Italy is poised to replace a large quantity of its rolling stock fleet. Given that at the moment only Bombardier, Alstom and now Hitachi Rail have a local footprint, they are surely in the pole position.
So, these are some of my thought, what do you think?