Why rolling stock consolidation plans are flawed and should be abolished

Last week, it became clear that not only Bombardier and Siemens but also Alstom and Siemens appear to be in merger discussions. This is why I would like to point out a bit the rationale behind these two proposals and explain why I think their plan is flawed.

Reasons for consolidation

First of all, it is important to point out the obvious reasons for consolidation and what it would mean in these two cases.

Overall, the reasons for consolidation can be divided in these categories:

  • Economic reasons (strategic)
    • Economies of scale driven
      • production can be much more efficient with a bigger customer base (i.e. optimal utilization of manufacturing plants)
      • utilization of synergies (i.e. having only one marketing and sales organization for each geography instead of two)
    • Economies of scope driven
      • A higher variety of products allows to better cater to the market (i.e. delivering signaling together with the civil works and the rolling stock)
      • utilization of synergies (i.e. applying one concept and learning in another market segment)
      • Deliver services that cannot be delivered by a smaller organization
  • Change management driven (change)
    • Consolidation allows companies to disinvest from certain activities (i.e. underperforming manufacturing sites, specific top management persons, etc…)
    • Repositioning of the company in the market (getting rid of legacy problems)
    • Resolve overcapacities in the market (i.e. in the steel industry)
  • Financially driven (short term)
    • Balance the balance sheets and income statement to reduce high costs of capital (i.e. due to cash flow problems)
    • Bring in new products for the product pipeline (mostly in pharmaceuticals)

While there has been no decision made yet and apparently no specific offer has been disclosed, it will most likely include all of the reasons above to a certain extent.

Why less is more in railways

Looking at the railway, and specifically the rolling stock market from a strategic perspective, I have to point out that a consolidation of the companies, Alstom-Siemens or Bombardier-Siemens does not make any sense.

They all have a similar scope of products and services, as well as a similarly advanced product  pipeline. Furthermore, their manufacturing sites and organization are already big enough, so the synergy potential will be very small. Lufthansa has made that point once very clear when pointing out that a large homogeneous airplane fleet does only incrementally improve synergies but heavily increases risks.

Moreover, the sickness in the railway industry, that decisions are reactive driven, fear guided and very slow will be strengthened by a larger organization. The intrapreneurial flexibility within the organizations will further decrease and the responsiveness to the markets’ needs will deteriorate.

Given the ongoing challenges with digitalization and an upcoming strong Chinese market player, the faster and more dynamic company has the best chances to gain market share and outpace the competition.

Overall, I do see no strategic reasons that would support such a consolidation.

So, why do it at all?

I assume that the drivers behind are mostly the cash flow problem of Bombardier and the intent of Siemens to disinvest from its low margin rolling stock business. Other reasons could of course be the power hungriness of the top management of these organization and the – unjustified – feeling that big is better in competing with the upcoming Chinese giant.

Overall, I think its a flawed idea and will not benefit any of the participants.

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