Heading Off Track: The Impact of China’s Mercantilist Policies on Global High-Speed Rail Innovation

Nigel Cory April 26, 2021
April 26, 2021
Chinese high-speed rail firm CRRC is less innovative than European and Japanese firms, but mercantilist policies help it dominate in China and expand globally. This starves superior firms of revenue, reduces their R&D, and slows the pace of global innovation.
Heading Off Track: The Impact of China’s Mercantilist Policies on Global High-Speed Rail Innovation

Introduction

High-Speed Rail Technology and Innovation: The Past and Future

The Competition Between China, the EU, Japan, and the United States for Global Rail Production and Exports

China’s Mercantilist Toolbox for High-Speed Rail

China’s High-Speed Rail Mercantilism Goes Global

Testing the Hypothesis: Assessing the Comparative Innovation Performance

Policy Recommendations

Conclusion

Appendix 1: Kawasaki’s Battle to Keep Ahold of its Technology in China

Appendix 2: CRRC’s Growing Role in Europe’s Rail Market

Appendix 3: CRRC and Other Chinese Rail Firms’ Global Acquisitions to Access Rail Technology and Markets

Endnotes

Introduction

High-speed rail is a technology-driven sector that has taken decades for the leading Japanese and European firms, and the broader ecosystem of component suppliers in the United States and elsewhere, to master. Yet, over the previous 20 years, China used mercantilist policies to rapidly and unfairly close the gap. For example, it used the development of its massive high-speed rail network to unfairly seize foreign technology and know-how to support its local champion, CRRC, and other rail firms. This diverted huge amounts of revenue that, had China’s high-speed rail network been based on comparative advantage and market-based industrial development, would have otherwise gone to leading foreign firms.

The impact continues to grow as China supports CRRC’s efforts to seize global market share. Chinese rail firms are increasingly competitive with foreign rail firms but remain less innovative. By taking global market share from these more-innovative firms, China’s rail industrial policy continues to detract from innovation in the high-speed rail sector, which otherwise would be developing better, cheaper high-speed rail systems.

Chinese rail firms are increasingly competitive with foreign rail firms but remain less innovative.

China could just as easily have used its vast financial resources to import foreign rail products and rail systems. But it did not want to do that, even as it ran massive trade surpluses with the rest of world. It could have attracted foreign firms to set up their own local production and research facilities as part of a normal pattern of foreign trade, investment, and industrial development. Instead, it wanted local firms to control the rail sector. Over time, China’s mercantilist policies evolved as its firms became more competitive. It ratcheted up restrictions to help those firms move up the value chain and throughout the sector from freight to light rail and metro to large and fast passenger trains, before ultimately getting to the crown jewels: high-speed rail. China wanted to build up its own high-speed rail industry, to sell not only in China but around the world.

China did this through an array of unfair, mercantilist practices. In violation of World Trade Organization (WTO) rules, China linked domestic rail contracts to forced foreign technology transfers. (Local content requirements are common in large rail projects, but forced technology transfers are not). It also compelled two state-owned rail companies to merge to create China’s national-champion CRRC, which has about 95 percent of China’s high-speed rail market, with Bombardier a distant second through its forced joint venture (JV) with CRRC.[1] Over time, local procurement rules increasingly penalized bids involving foreign firms, products, and technology, channeling more procurement contracts to local firms and technology. China also provided huge subsidies and other financial support to domestic firms such as CRRC to not only expand in China, but to “go out” and seize global market share.

Outside of China, the major firms are Alstom (France), Bombardier (Canada, which Alstom recently acquired), Hitachi (Japan), Hyundai Rotem (South Korea), Kawasaki Heavy Industries (Japan), and Siemens (Germany). There are relatively few of these firms, as it takes large and long-term investments in research and development (R&D) and CapEX to develop the necessarily technology and train systems. These companies lead consortiums of other rail firms and component suppliers as part of their bids for government rail contracts. This makes China’s mercantilist approach to high-speed rail especially damaging, as there are few opportunities for these firms and their component suppliers to earn the revenue that further supports innovation in a highly specialized set of technologies. More of the Chinese and global market for high-speed rail would have otherwise gone to these foreign firms—which did, and in many areas still do, lead in terms of advanced rail technology—had they been able to enter and compete on fair terms. If China had taken a more open and collaborative approach, it would have contributed, rather than detracted, from high-speed rail innovation.

The first section of this report summarizes innovation in high-speed rail, including a case study on magnetic levitation (maglev)  technology. The second section analyzes the growing impact China’s approach has had on global markets and foreign firms in Japan, Europe, and the United States. The third section delves into China’s embrace of mercantilist policies for high-speed rail, especially forced technology transfers, massive financial support for domestic high-speed rail firms, discriminatory procurement and market access rules, and its creation of a monopolistic national champion, CRRC. It includes a case study of how China uses “hidden” market barriers in the rail sector to disadvantage foreign firms and products. The report includes two annexes about Kawasaki’s battle to keep hold of its technology in China, and CRRC and other Chinese rail firms’ global acquisitions of foreign rail firms.

The fourth section analyzes how China’s high-speed rail mercantilism has gone global and how CRRC and other rail firms have entered and started competing for a growing share of developed and developing country markets. The report includes an annex that details CRRC’s entry into Europe and what this reveals about its strategy to seize market share in global markets. The fifth section provides a qualitative and quantitative assessment of comparative innovation in the high-speed rail segment among Alstom, CRRC, Hitachi, Kawasaki, and Siemens in looking at R&D spending and patents. It also includes an estimate as to the impact CRRC’s siphoning of revenue and market share has had on Alstom’s (its main high-speed rail competitor) R&D capabilities in terms of patents.

The report concludes by providing a range of recommendations for policymakers from the Americas, Asia-Pacific, Europe, and elsewhere to push back on China’s high-speed rail mercantilism both at home and abroad. Recommendations are divided between measures to restrict China and those that are needed to support market- and innovation-driven firms.

Restricting China and CRRC:

  • Countries should block Chinese acquisitions of local rail firms due to Chinese firms benefitting from stolen intellectual property (IP) and huge financial subsidies. In particular, the EU should help individual member states improve their foreign investment screening frameworks.
  • Countries should use the considerable powers they have over domestic procurement contracts to exclude Chinese rail firms and work together toward fairer international procurement markets. Public procurement plays a major role in high-speed rail projects, which gives governments a mechanism to promote innovation while screening out bidders for technology theft, unfair state-based financial support, and non-reciprocal market access.
  • Countries should push the World Bank to stop all rail-related funding in China and its engagement with Chinese firms in rail projects elsewhere around the world.

Supporting domestic innovation and market-driven firms:

  • Countries should provide more low-cost and easy-to-access export financing to help local rail firms compete with CRRC and other Chinese rail firms for foreign projects and sales. Large amounts of such long-term financing are one of China’s main tools for seizing market share around the world.
  • Countries should provide financial incentives to host, and help local firms send experts to, international standards discussions related to high-speed rail. The development and use of standards play a critical role in high-speed rail projects.
  • Given the state-sponsored nature of CRRC (and other Chinese rail firms), countries should consider allowing their own rail firms to merge to ensure they’re in a better position to compete.
  • Countries need to provide more funds as part of a long-term supportive R&D framework for rail firms.

High-Speed Rail Technology and Innovation: The Past and Future

High-speed rail is a complicated technology that has long been a symbol of economic and innovation prowess. The International Union of Railways defines high-speed rail as systems of rolling stock and infrastructure that regularly operate at or above 250 kph (155 mph) on new tracks or 200 kph (125 mph) on existing tracks.[2] High-speed rail has many economic and societal benefits relative to cars and planes. It has lower operating costs and more rapidly connects people, thus enabling greater productivity across every downstream industry that leverages it. High-speed rail also reduces negative externalities such as automobile accidents, highway congestion, and greenhouse gas emissions.

China is the world’s largest market for high-speed rail. It is home to over two-thirds of the world’s high-speed rail lines and operates by far the world’s largest high-speed train service, with over 2,600 pairs of high-speed trains running every day.[3] This is all the more astounding given China only opened its first fully high-speed rail line in 2008. Since then, China has opened thousands of kilometers of high-speed lines with speeds ranging from 200 to 350 kph.[4] To do this, China spent hundreds of billions of dollars on the world’s most expensive public-works project since President Eisenhower’s Interstate Highway System of the 1950s.[5] And China isn’t finished. In May 2020, the China State Railway Group (CSRG)—which owns all high-speed rail services in China—announced plans to link all major cities with more than 500,000 people to the high-speed rail network.[6] In August 2020, it announced plans to double the length of China’s high-speed rail network to 70,000 km by 2035.[7] As part of both economic-stimulus and industrial-development plans (including the Made in China 2025 plan, among others), China has provided hundreds of billions of dollars to mainly Chinese firms to build and operate the network and to fund its firms to develop and manufacture the full range of goods and services that go into integrated high-speed rail projects.

No doubt, China’s massive high-speed rail network has had a major positive economic, social, and environmental impact. The World Bank estimated that the economic rate of return of China’s high-speed rail network in 2015 was 8 percent, well above the opportunity cost of capital in China and most other countries.[8] However, it’s how China has pursued this strategy that is of legitimate concern for both its trading partners and foreign firms dedicated to competing based on innovation.

As CRRC became larger and more technologically advanced—on the back of foreign technology and know-how—China adapted its domestic restrictions to grow market share for local firms and technology. Foreign rail firms were largely restricted to providing components (also via forced JVs) as part of a shrinking market as China pursued ever-expanding control of technology throughout the sector, strategically picking and supporting local firms to provide copycat replacements for foreign technology, especially through ever-more-restrictive local procurement criteria. For example, in its 2020 World Rail Market Study—the only global assessment of the sector—the European rail industry association UNIFE (Union des Industries Ferroviaires Européennes) regarded the Chinese market as having been only 17 percent accessible for the period of 2017–2019, down 70 percent from 63 percent for 2009–2011. For comparison, the current accessibility rate in the European market is 79 percent.[9]

China pursues mercantilism despite having the financial resources to abide by the rules and norms of win-win global trade and innovation.

China goes far beyond the supportive industrial policies used in other countries, such as through tax and R&D policies. Its impact on the global high-speed rail market is unique due to the size and scale of its planning and financing, the importance of its domestic procurement market for global high-speed and general rail products, of its being on both sides of many projects (in terms of state-owned enterprises (SOEs)bidding for government contracts), and its willingness to use unfair and discriminatory rules to support local firms and technology. China pursues mercantilism despite having the financial resources to abide by the rules and norms of win-win global trade and innovation. It does this as it is guided by a different overarching goal: to control technologies in sectors it identifies as strategic, such as high-speed rail.

High-speed rail technology is extremely complex and generally takes a long time to master. The railway sector is like other innovation-driven sectors in that it involves high fixed costs and capital intensity, and, for the high-speed rail segment, is driven by the need for constant innovation, rather than focused on the marginal costs of its current products. In Europe, the railway supply industry (firms that sell trains and equipment to rail service companies) invests about 3 percent of sales in R&D, but high-speed rail firms typically invest between 5 and 10 percent.[10] The manufacture of locomotives and rolling stock(i.e., railway vehicles, including both powered and unpowered vehicles such as locomotives, railroad cars, coaches, and private railroad cars and wagons) is an IP-intensive industry.[11]

High-speed rail represents an innovation-driven industry given the need for faster, safer, quieter, smoother, and more environmentally friendly trains, train networks, and services. Firms continue to invest in the many technologies involved in wheel-based fast trains, as well as in train networks and the elusive potential of maglev trains (see box 1). It also involves the drive for innovation in the broader manufacture of locomotives and rolling stock.[12] Innovation in the high-speed rail sector is both supply and demand driven. In project tenders, the rail operators define performance requirements and the industry competes to offer the best products, which usually entails integrating the most cost-effective and innovative technologies. This involves both the main rail system integrator (e.g., Alstom, CRRC, Siemens, etc.) and the many component suppliers in the supply chain. It can also be a vertical process wherein the lead company asks its suppliers for a specific output, or a bottom-up process wherein a component is designed or improved by a component supplier.[13]

Technological innovation encompasses all elements of a high-speed train system beyond just the engine and cars: platforms, bridges and tunnels, track and power supply, train and network management and signaling systems, and after-sales and maintenance services. For example, achieving ever-greater speed gets exponentially more difficult and expensive.[14] These trains need the electricity to provide the power and the motors to cope with it. Power is typically supplied by overhead wires (around 15,000 to 25,000 volts) trains make contact with via a raised arm called a pantograph. However, these wires are not rigid, but draped, as trains passing underneath distort the shape of the wire and the whole frame holding the wires. Therefore, there is significant technology that goes into just keeping the pantograph in contact with the wire. A great deal of innovation also goes into designing the bogies that house the wheels, axles, transmissions, suspension, and braking devices (whether disc or magnetic) to provide a smooth, high-speed, and quiet ride.[15] The entire operating system is supported by sophisticated on-board diagnostic and control systems.

Data and digital technologies will play an increasingly important role in helping rail meet the rising demand for safe, reliable, convenient, and environmentally friendly transport at affordable prices. Digital technologies in high-speed rail affect both the consumer end of the sector and the production and after-sales service of rail equipment. Automation, big data, and the digital transformation of the supply chain are transforming manufacturing. For example, Siemens, GE, and others are deploying 3D printing technology for rail products.[16] Digital control and signaling systems greatly enhance the reliability and performance of operations, thus eliminating the need for outdated railway signal boxes and wiring. AI-driven enterprise asset management systems make for more efficient dispatching, routing, and maintenance scheduling.[17]

Advances in automation, self-diagnosis, and real-time geolocation tracking mean trains are becoming smarter and safer. Internet of Things sensors and devices are opening new possibilities for obstacle and damage detection, preventative maintenance, and linkages with other systems, logistics agencies, and government regulators. Such smart monitoring and surveillance systems are changing the way operators manage hazards, intrusions, railway crossings, and driver behavior.[18] The digitalization of rail allows for easier integration into other sectors and initiatives, such as smart cities and a flexible, green smart grid.[19]

High-speed rail firms also innovate through new business models, such as mobility as a service, that allow the use of a single application to provide passengers with access to multiple types of transport, all via a single payment. For example, Siemens’s high-speed rail line between Madrid and Barcelona is its flagship mobility-as-a-service package, as it sells predictable, affordable, and efficient transport availability (e.g., 99 percent availability), rather than just the train hardware. Siemens provides the digital services as part of a 20-year service contract for the project. However, this business model and these value-added services only work if Siemens has its hardware in place, as third-party platforms have different data protocols.[20]

Box 1: Future Innovation: Maglev

The use of magnetic levitation—known as maglev—to propel vehicles is part of the race to develop the next generation of technology that will define and supersede the current symbol of high-speed trains: Japan’s bullet trains (Shinkansen). It is mainly a Sino-Japanese battle for tech supremacy—and national pride is not an insignificant part of this contest.

With maglev, a vehicle is levitated a short distance from a guideway using magnets to create both lift and thrust. The technology goes back to 1912, when Emile Bachelet invented a magnetically levitating display model.[21] The magnets used are cooled by liquid helium or nitrogen, whose lack of friction means faster speeds and lower noise than wheeled transport. High-speed maglev trains could fill the gap between jet passenger planes (around 800 kph) and conventional bullet trains (around 350 kph). Keeping a floating train at the right distance from the track is very challenging, requiring extremely sensitive controllers to quickly adjust the magnetic field if the train moves too far from, or too close to, the track. When travelling at 600 kph, the time it takes for devices to detect and adjust the deviation on a maglev train is about one-thousandth of a second.

Beyond the challenge of developing the requisite technology, there is considerable uncertainty about the safety of high-speed maglev trains lines. And the most common argument levelled against maglev has always been cost—estimated to be about 1.5 times greater than conventional bullet trains—given projects are required to start from scratch because they cannot be integrated into a standard rail infrastructure.[22] Meanwhile, proponents of maglev technology contend that the key to affordability is the use of small, light-weight vehicles that can operate on less-expensive guideways and thus require less power for propulsion.[23]

The race to develop a commercial maglev network is not new.[24] Maglev technology has not become commonplace, in spite of its European and Japanese beginnings. Germany and Japan began conducting maglev R&D in the late 1960s and 1970s. Japan has since developed multiple test tracks, which it has gradually lengthened as part of ongoing testing and development.[25] Japan has a limited low-speed maglev rail network—the Linimo Line, which was made for the World Expo 2005—which runs at 100 kph.[26] Japan has since budgeted tens of billions of dollars to build the Chuo Shinkansen maglev line to cover the 178 miles between Tokyo and Nagoya. It will use cryogenically cooled superconducting magnets to levitate trains that run at speeds of up to 500 kmh. Early tests have shown the train could reach speeds over 600 kmh. It’s targeted to start operations in 2027.[27]

In April 2020, Hitachi unveiled the latest prototype Series L0 for this line, which offers 13 percent less air resistance than the previous prototype. That older prototype used gas turbine generators to power lighting and air-conditioning, while the newer design uses a wireless connection to the ground supply.[28] Germany’s first maglev train was used for an international fare in Hamburg in 1979. The country then began developing a maglev line for use to and from Munich airport, until an accident in 2006 during a test killed 23 people.[29] South Korea’s first maglev line, linking Incheon International Airport to Seoul, opened in 2016. Meanwhile, the United Kingdom operated the first commercial maglev train—the Birmingham airlink shuttle—which ran from 1984 to 1995. This is indicative of how hard it has been to develop maglev technology beyond its limited use as a demonstrative, futuristic technology.

China has firmly set its sights on leading the development and deployment of maglev technology. The Ministry of Science and Technology’s Advanced Rail Transit program (initiated in 2016) includes a goal to develop a 600 kph high-speed maglev transportation system. In 2019, high-speed maglev was included as a frontier key technology in China's “Outline for the Construction of a Powerful Country” and a government whitepaper, “Outline for Building China’s Strength in Transport,” includes an entire chapter on the development of new maglev lines between its key urban hubs.[30] China aims to put a 500 km-long high-speed maglev line into commercial use by 2025. But like every other country, China needs to do a lot more testing and then planning and development for the broader use of the technology before it is ready for network-scale commercial operations. However, experts have argued that China’s maglev technology remains immature and that its one operating high-speed maglev project—the Shanghai airport line—is a financial black hole.[31]

There are many technological issues to overcome to develop and deploy high-speed maglev trains as part of an integrated transport system. There is also the overarching question as to whether there is an ideal distance and market that can leverage maglev’s higher speeds at an affordable price (as compared with planes and rail-bound high-speed trains). At the moment, China’s government is betting that it can do both as it throws significant financial resources and policy support behind its firms to make maglev trains happen.

Launched in 2004, China’s only commercial, high-speed maglev service runs the 19 miles between Shanghai and Pudong International Airport, at 300 kph. However, it’s based on foreign technology, as Siemens Transportation Systems Group built the propulsion, control, and safety systems, and ThyssenKrupp Transrapid built the vehicles and motors. With about 10,000 passengers per day, the line likely runs at a significant loss, given it cost about $1.7 billion to build.[32] Supporters of greater maglev network investment point to Shanghai’s maglev train, which has operated over 100 trips a day for almost 15 years. But it is also a JV, so China does not control the underlying technology—which is explicitly what China wants to do when it deploys maglev trains at home, and no doubt, eventually overseas.[33]

Beyond this, China has several medium- and low-speed maglev trains working or planned. In 2016, it built an 18.6 km maglev line linking Changsha with Huanghua International Airport (running at 100 kph).[34] In 2018, it built a 9 km elevated maglev line serving the western part of Beijing.[35] A maglev line in Qingyuan, Guangdong Province, is due to open this year.[36] Chinese state media has reported that China is planning to develop maglev lines between Hangzhou and Shanghai, Guangzhou and Shenzhen, and Chengdu and Chongqing. In addition to the Qingyuan line, a Fenghuang County (Hunan) line will run short-distance, low-speed maglev trains that will also be operational by 2021.[37] China seems set on using foreign IP in maglev development, much as it did with wheel-based technology. In January 2021, Southwest Jiaotong University, China Railway Group, and CRRC unveiled a maglev test track in Chengdu that is based on technology Siemens and ThyssenKrupp developed for the Shanghai airport maglev track. Yet, again, this prototype track allegedly uses domestically developed technology.[38]

CRRC is developing the levitation and guidance system, the speed and location-detection system, as well as the broader control system for many of China’s maglev prototypes. According to CRRC, by the end of 2020, it was to have made five high-speed maglev test vehicles. It is currently also working on building an integrated engineering system for the maglev system.[39] Yet, recent maglev projects show that it still needs foreign technology and know-how. In June 2020, Chinese media reported the test of a new maglev vehicle—designed to travel at 600 kph—on a 1.5 km test track in Shanghai.[40] The $1.3 billion project was jointly developed by Shanghai Maglev Transport Development Ltd. and a German consortium consisting of Siemens, Thyssen Transrapid, and Transrapid International.

But indicative of the shortfalls in China’s propensity to create industrial overcapacity through its state-directed approach to industrial development, in 2018, Beijing ordered CRRC to halt the development of maglev production plants as part of broader orders to stop local governments from building excessive local transit projects that drive up debt and create overcapacity in industrial production. For example, CRRC’s Changsha factory was expected to produce 60 maglev trains a year once completed, which is obviously much more than the global market could actually currently support.[41]

The Competition Between China, the EU, Japan, and the United States for Global Rail Production and Exports

The global rail industry has changed significantly over the last two decades. This section details how China and CRRC’s emergence as major producers and exporters has changed the global market, and how this compares with European, Japanese, and U.S. firms and high-speed rail developments. It’s important to note that the focus of this report, high-speed rail, is a proxy for the broader rail sector—which provides the foundation the major rail firms innovate and compete on. The broad rail sector includes light, metro, and regional passenger trains and freight trains. This report therefore indirectly relates to the full range of component suppliers to these various rail market segments—all of which are affected by China’s mercantilist approach to high-speed rail.

Market Size and Shares

The global high-speed rail market is relatively concentrated and only involves a few dozen countries. China, Denmark, France, Germany, Italy, Japan, Morocco, Saudi Arabia, South Korea, Spain, Switzerland, Taiwan, Turkey, and the United Kingdom all have high-speed railways.[42] Parts of the United States’ “Northeast Corridor” between Washington DC, New York, and Boston operate at high speed. There are also high-speed lines in development in California, Florida, Nevada, and Texas.[43] Several developing countries have started or are considering initiating high-speed rail projects, including Egypt, India, Indonesia, Laos, and Thailand.[44] In 2020, China represented more than two-thirds (68 percent) of the world’s high-speed rail network, with 35,740 km in operation. The global total is an estimated 52,000 km, out of which 10,766 km are in Europe, 1,043 km are in the Middle East, and 735 km are in North America.[45] Similarly, out of approximately 6,000 high-speed trainsets, about two-thirds are in Asia and one-third is in Europe.[46]

Based on firm and industry estimates (and limited public data), we determined that annual revenues for the high-speed rail rolling stock market (i.e., railway vehicles) were $8 billion to $9 billion annually for 2015 to 2017, and $10 billion to $11 billion for 2017 to 2019.[47] China accounted for the vast majority of this global market, estimated at around 72 percent for 2015 to 2017 and 75 percent for 2017 to 2019. Europe accounted for the majority of the remaining market share.

CRRC has the largest share of the global high-speed rail market due to its dominance of the Chinese market. It has accounted for two-thirds to three-quarters of all deliveries in the market over the last decade.[48] Alstom’s, Hitachi’s, Kawasaki’s, and Siemens’s market shares are largely due to projects in their respective home markets, and in a small number of cases, export orders. However, they have each lost relative and absolute market share as a result of mostly missing out on the large and fast-growing Chinese market. Given this shift, Alstom’s, Hitachi’s, and Kawasaki’s market shares dropped from around 20 percent each between 2007 and 2009 (when China’s first high-speed line went into operation) to less than 10 percent each from 2015 to 2020. Meanwhile, Siemens lost both absolute and relative market share during the same timeframe.

There are only ever a few high-speed rail projects in the global market at any one time. This is why it’s critically important to ensure each of these is fair and open and only involves firms that are market driven instead of state driven.

Media reports provide supporting data for the impact of China’s strategy, CRRC’s emergence, and the waning fortunes of foreign firms.[49] In 2002, China reportedly invested nearly $6.3 billion in the high-speed market—for carriages, signaling equipment, and other high-tech track components—in which foreign companies competed and captured about 70 percent. In 2010, China invested an estimated $23 billion in the segment, of which foreign companies only accounted for an estimated 15 to 20 percent and earned nor more than they had in 2002.[50] At that time, foreign multinationals were still importing the most-sophisticated components, such as traction motors and traffic-signaling systems, but these components accounted for less than 20 percent of China’s then-high-speed rail market.[51] More recently, (with rare exceptions) foreign firms have stated that China’s high-speed rail market has been effectively closed to them for most of the last decade.

The global high-speed rail market will continue to grow, albeit at a slower pace, as compared with the dramatic China-driven growth between 2010 and 2020. The World Rail Market Study estimates average growth of 2.7 percent worldwide for the 2021–2023 period.[52] To make matters worse, global market access (as defined by the World Rail Market Study) has been decreasing over time, aggravated by rising protectionism in China (and elsewhere).[53] In 2020, there were an estimated 11,000 km of high-speed lines under construction, of which around half were in China.[54]

The global high-speed rail market is characterized by a few infrequent but large government procurement projects being open for bids and in construction at any one time, in a relatively small number of countries. Since 2008, there have been many high-speed rail projects in China (and to a far lesser extent, Japan and South Korea), but only 19 (contestable) tenders elsewhere, of which 11 were in Europe.[55] Leading high-speed rail firms feel compelled to bid on every one of the few high-speed rail projects, thus each is critically important in providing economies of scale for the large investments in production and R&D involved in high-speed rail products. This is why it’s critically important to ensure each of these is fair and open and only involves firms that are market driven instead of state driven.

While Europe remains a major market and continues to expand its high-speed rail network, it faces many challenges. A 2018 audit of the EU’s network was highly critical. It did not think that the European Commission’s long-term plan to triple the length of high-speed rail lines—from 9,700 km in 2008 to 30,750 km by 2030—was supported by credible analysis or resources.[56] It also stated that, in reality, there was no European high-speed rail network, but rather an ineffective patchwork of national lines. It pointed out that the European Commission lacked the legal tools and powers to force EU member states to build an integrated high-speed rail network.[57] Even on its high-speed lines, the maximum speeds (300 kph) are never reached in practice: Of the lines audited, trains ran on average at only around 45 percent of the line’s design speed and only two lines operated at an average speed above 200 kph, and none above 250 kph.[58]

Sector-level data provides a broad snapshot of production and export changes in the high-speed rail segment—but it obviously also includes other rail segments. While not specific to the high-speed rail segment, changes in the broader sector still reflect China’s growth as the world’s largest producer and market. In 2000, EU rail sector production was more than double the next-highest producer (the United States) and more than three times Chinese production (see figure 1).[59] But as China ramped up its rail and high-speed rail system and required domestic production, Chinese production rapidly increased and overtook EU production in 2009. In 2017, Chinese production was nearly twice that of EU production (and nearly 6 times as large as U.S. production).

Figure 1: Rail supply industry production (locomotives and rolling stock, major global economies active in the sector, fixed 2017 ex rates)[60]

Export Share

While China has only recently started competing for, and initiating, high-speed rail projects around the world, its and CRRC’s ambitions are clear in that they plan to both directly compete for as many future high-speed rail projects as possible and build market share in other rail segments as a way to gain a foothold in the high-speed segment (see annex 2 for an analysis of CRRC’s efforts to access and build market share in Europe).

The Chinese rail sector’s impact on the broader rail market is indicative of its central role in the global market and what it no doubts would like to achieve in the global high-speed rail segment. Exports from China barely registered in 2000 but increased to around €2.1 billion in 2017 (see figure 2). The EU retained its position as the world’s largest exporter over this time, with exports growing from around €1.4 billion in 2000 to nearly €4.8 billion in 2017. However, after a few years (2012 to 2014) of near €6 billion in exports, China’s exports decreased to around €4.8 billion from 2015 to 2017. Meanwhile, rail exports from Japan also increased, but by much less, from around €300 million in 2000 to €1.3 billion in 2017.

China became a net exporter of rail products in 2010, and while it is still behind U.S., European, and Japanese firms in terms of export intensity (ratio of imports/exports), it still plays a growing role in global markets, especially in developing countries. China’s growing production capabilities are also reflected in EU imports of rail products from China, which more than doubled from €101 million in 2011 to €212 million in 2017.[61] Indicative of shrinking rail market access in China, EU exports of locomotives and rolling stock to China decreased from €865 million in 2011 to €505 million in 2017.

Figure 2: Rail supply industry exports (locomotives and rolling stock)[62]

Leading High-Speed Rail Firms

CRRC is clearly the largest firm in the global locomotive and rolling stock market. Alstom is CRRC’s most direct, pure-rail competitor in the global market. Even Alstom’s and Bombardier’s (which Alstom acquired) combined 2017 revenue still pales in comparison to CRRC’s. Besides these two firms, the other major firms involved in high-speed rail are Hitachi, Hyundai Rotem, Kawasaki, and Siemens (see figure 3). Besides CRRC, China Railway Signal & Communication Corporation (CRSC) is one of the largest rail transportation control-system providers in the world.

Figure 3: Leading rolling stock manufacturers in 2017 by revenue of rail activities[63]

CRRC is not only much larger than its competitors, but it also has the broadest capabilities in the rail market (see figure 4). This highlights the broad threat China’s rail mercantilism poses (via CRRC) to rail firms in all segments—not just the high-speed ones—as it is able to leverage the same mercantilist tools in these segments.

Figure 4: Position of top rolling stock manufacturers, globally, 2018[64]

Japan

Japanese firms’ role in the global rail market reflects the fact that high-speed trains were pioneered in post-war Japan in the 1950s and early 1960s with the construction of the Shinkansen bullet trains. Ever since it was launched for the 1964 Olympic Games in Tokyo, the Shinkansen has remained a source of national pride in Japan. These firms and the government continue to invest in high-speed trains and rail networks. In July 2020, Central Japan Railway introduced the next-generation Shinkansen, the N700S, which reaches a maximum speed of 300 kph.[65] Indicative of the development challenges involved in high-speed rail, it is the first fully remodeled bullet train in 13 years. In 2019, Japan started testing the ALFA-X version of the Shinkansen train, which can run at speeds up to 360 kph, with plans to bring it into service after 2030.[66]

Hitachi and Kawasaki Heavy Industries are two of the main manufacturers of Shinkansen trains, which are thus the basis for both of their exports and international projects. For example, Taiwan’s high-speed rail network uses both Kawasaki and Hitachi trains, while a range of lines in the United Kingdom use Hitachi’s Shinkansen technology. Kawasaki’s exports in China are likewise based on Shinkansen technology (see the annex case study).

Hitachi’s competitive position and recent strategic decisions are a useful reference when considering CRRC’s impact on the high-speed rail sector. Hitachi was once floated as a firm that might take over Bombardier’s rail assets.[67] Although Hitachi never launched a bid, its relative size explains why the acquisition could have helped it compete. As figure 3 shows, Hitachi is considerably smaller than its main rivals—its 2017 revenues of $4.1 billion were one-quarter of those of the merged Alstom/Bombardier and only 13 percent of CRRC’s.

Hitachi has instead sought to partner with larger firms to compensate for its lack of scale. In 2010, a Bombardier and Hitachi JV won a contract to produce 50 high-speed trains (the ETR 1000, Europe’s fastest train) as part of a €1.5 billion deal with Italy’s largest operator, Trenitalia. Subsequent deals in Spain and Italy brought the JV’s total production to 87 high-speed trains.[68] They also submitted a joint bid to produce train cars for the United Kingdom’s HS2 project.[69] However, the Alstom-Bombardier merger reduced the need for another partner such as Hitachi in the future.[70]

Europe

Europe’s high-speed rail firms—especially Alstom and Siemens—are global leaders in many parts of the global rail and high-speed rail markets due to their innovation, skilled workforces, and ability to deliver integrated transport projects. There are also other smaller high-speed rail firms such as Stadler (Swiss), CAF (Spanish), and Talgo (Spanish).[71]

European firms benefit from the single European railway area, which provides common standards and regulations that they’re often best placed to meet.[72] The EU’s high-speed rail network has doubled in length since 2003; and by the end of 2017, it had over 9,100 kilometers, with plans to triple the length of its network by 2030.[73] However, its network faces some key issues, namely, ensuring trains actually run at maximum speed and integrating its high-speed lines with other forms of transport.[74] Another key strength is the well-established supply chain and the close collaboration between different segments and actors on the development of advanced products and solutions, such as the European Rail Traffic Management System (ERTMS).

These leading high-speed rail providers in the global market also support a much larger ecosystem of component suppliers that equip light, metro, and slower-speed passenger and freight trains. The United States and the EU are home to many of these firms. For example, in 2018, there were around 1,831 companies in the EU involved in manufacturing railway locomotives and rolling stock, including 541 in the United Kingdom, 369 in Germany, 196 in Poland, 135 in Italy, 99 in France, 98 in Spain, 72 in the Czech Republic, 47 in Romania, 46 in Hungary, and 38 in Sweden.[75] But this only provides a partial snapshot, as it doesn’t take into account the hundreds of other EU firms that are also involved in signaling and electrification and rail infrastructure.[76]

European policymakers need to realize that while the EU’s regional standards act as a barrier to CRRC and other Chinese rail firms, these barriers are not insurmountable and these firms are strategically working toward acquiring and developing the standards and technical references to achieve greater market share. For example, firms need to meet the Technical Standard for Interoperability (TSI) to bid on European rail projects. As of 2019, CRRC reportedly did not have a TSI-compliant high-speed platform.[77] However, CRRC and other Chinese firms are no doubt working toward meeting the EU’s TSI so they can compete for a broader range of projects. CRRC has a factory in China that claims to operate to some TSI standards.[78] CRRC and other EU- and China-based rail R&D centers are also working toward these standards.[79]

United States

The United States still has considerable interests at stake in the global high-speed and broader rail markets, despite it not being home to a leading high-speed rail firm.[80] As such, China’s competitors for high-speed rail projects in the United States and elsewhere have been largely European and Japanese rail companies. However, the United States remains both a major general rail producer and exporter, and potential market for high-speed rail. As figure 1 shows, U.S. rail industry production only increased from around €8 billion in 2000 to just over 10 billion in 2017, while according to figure 2, rail exports increased from around €1.2 billon to €2.1 billion over this same time.[81]

Alstom, Bombardier, Kawasaki, and Siemens have all set up local production sites that, together with U.S. specialized and general train component and service suppliers, form the supplier base for high-speed rail and the broader rail sector in the United States. For example, Siemens is one of only a few firms to make train bogies in the United States, as its Mobility’s factory in Sacramento, California, manufactures locomotives, railcars, and trams.[82] Hitachi has a rail factory in Miami, Florida, that supports more than 50 subcontractors and suppliers.[83] Kawasaki has operated a rail car manufacturing factory in Lincoln, Nebraska, since 2002.[84] In terms of U.S. firms, large diversified industrial companies such as GE, Caterpillar, and Wabtec are the fourth-, sixth-, and eighth-largest rail rolling stock manufacturers in the world, respectively (see figure 3). In addition, more than 750 companies in at least 39 U.S. states make components for transit, passenger, and high-speed trains and associated rail products.

The U.S. rail sector supplier base benefits from foreign investment and R&D from these foreign (non-Chinese) firms. As is typical in high-speed rail projects, the leading high-speed firms lead consortiums to bid on large rail projects that also include, or need to draw on, local suppliers and products. Siemens is the leading firm in the consortium for the new West Palm Beach/Ft. Lauderdale-to-Miami and Los Angeles-to-Las Vegas high-speed rail projects, while Kawasaki is the lead provider for the Houston-to-Dallas project.[85] Meanwhile, Alstom is leading a consortium to assemble 28 new sets of high-speed trainsets for Amtrak’s upgraded Northeast Corridor service at factories in New York State, with 95 percent of the content produced in the United States.[86] U.S. firm Transitair Systems LLC (TTA) Systems (based in Hornell, New York), a subcontractor for Alstom, is working to build tilting bogies as part of an order for 392 high-speed rail cars.[87] In line with this, both Amtrak and Alstom hope this project will support the growth of an American supply chain for high-speed rail equipment, as the absence of such a supply network raised the costs and limited design choices for the original Acela project in 2000 (which was led by a joint Alstom-Bombardier consortium). Amtrak and Alstom officials blamed a 2005 disruption in Acela services (from April to July, due to cracks in many trains’ brake rotors), in part, on Acela’s reliance on a narrow, specialized supplier base.[88]

Alstom, Bombardier, Kawasaki, and Siemens have all set up local production sites that, together with U.S. specialized and general train component and service suppliers, form the supplier base for high-speed rail and the broader rail sector in the United States.

U.S. firms also produce specialized parts for high-speed train systems, such as signaling and train controls (Wabtec), specialized technology for inspecting high-speed wheels (Waygate Technologies), and others.[89] For example, Wabtec provides specialized high-speed rail components (such as the pantograph) and a broad range of other components and services used for both high-speed and light and metro rail systems, including air conditioning, windows, doors, and maintenance and cloud-based services.[90] Wabtec is the product of a several rail-related mergers and acquisitions involving well-known U.S. industrial firms. It was initially formed by the merger of the Westinghouse Air Brake Company and Motive Power Industries Corporation in 1999. In 2019, Wabtec merged with General Electric (GE) Transportation, combining its broad range of freight, transit, and electronics products with GE Transportation’s equipment, services, and digital solutions in the locomotive, mining, marine, stationary power, and drilling industries.[91] Indicative of Wabtec’s position and how it plays a role in broader rail projects, in August 2020, Virgin Trains awarded Wabtec a $120 million contract to provide signaling and train control systems along some of its high-speed Miami-to-Orlando lines (which use trainsets from Siemens).[92]

China’s Mercantilist Toolbox for High-Speed Rail

China has used an extensive and coordinated set of mercantilist tools to gain high-speed rail technology and market share. It refined and ratcheted up the restrictiveness of these tools over time as its firms became larger and more competitive. This section analyzes China’s use of these tools: foreign technology transfer for market access (including a case study on Kawasaki Heavy Industries in China); massive financial support for domestic high-speed rail firms; discriminatory management of China’s massive domestic high-speed rail market; squeezing out foreign firms and products while creating and supporting local ones (including a case study on “hidden” market barriers in China’s transit market); and creating a monopolist national champion (CRRC). Consistent with China’s approach to other strategic technology sectors, this section’s analysis of these tools shows that China’s innovation mercantilist playbook is in fact quite simple:

  1. Identify a technology/industry as a key national goal.
  2. Use access to the giant and monopolistic Chinese market as a weapon to force foreign companies to engage in JVs and compel the transfer of foreign technology to Chinese firms.
  3. Use a variety of means, including direct subsidies, low-interest loans, tax breaks, forced mergers, foreign acquisitions (see annex 3), discriminatory public procurement, and other incentives to accelerate Chinese firms’ technological and competitive capabilities.
  4. Once Chinese firms have mastered foreign technology and gained domestic market dominance, finance “going out” (i.e., exporting to foreign markets) on the basis of a protected and subsidized domestic market and massive export subsidies.

China’s strategic economic, trade, and innovation policy prioritizes high-speed rail technology. Indicative of this, China budgeted $549 billion in its 13th Five-Year Plan (2016–2020) to expand and upgrade the country’s rail system, with most of the money earmarked for high-speed trains. High-speed rail is not only part of the central government’s five-year national plan, but also various associated strategies, such as the Made in China 2025 plan, the Belt and Road Initiative, the China High Speed Train Independent Innovation Joint Action Plan, and other railway-specific schemes.[93] China’s railway strategy, which was revised in 2008 and 2016, looks up to 15 years ahead and is complemented by its own five-year plans.[94] Hundreds of additional plans continue to be issued at lower levels of government to pursue these goals. For example, the Hebei Province’s 13th Five-Year Plan includes a sectoral plan for rail transit industry development. At the next level down, key projects are listed at the city level, such as Tangshan’s focus on high-speed passenger cars.[95] As detailed in this report, there are plenty of opportunities for Chinese government officials to informally require technology transfers and provide central government deniability.

China’s high-speed rail strategy has evolved over time as the country has moved increasingly toward mercantilism. In the 1980s and 1990s, the government focused on incremental domestic innovation to develop indigenous electric multiple units (or “electronic motor units” (EMUs)), which involve multiple self-propelled carriages, not separate locomotives.[96] For example, China established a specialized technology group to develop and deploy technology for the Beijing-Shanghai high-speed rail line.[97]

But the Chinese government realized that Chinese firms did not possess the needed know-how to do this. So in addition to ongoing R&D, in the mid-1990s, China’s former Ministry of Railways (MOR) decided to develop high-speed EMUs based on “learning” from foreign technologies, namely, from a leased train from Swedish firm ADTranz, which ran on a line between Guangzhou and Shenzhen.[98] However, because of the rising costs of maintenance and increasing technological deficiencies, China chose not to pursue broader deployment of this train technology. Then, from 1999 to 2001, MOR and local firms worked to develop indigenous EMU prototypes (presumably based on reverse engineering the ADTranz), but due to technological deficiencies, none made it to mass production.[99] The exception was the DJJ1 “Blue Arrow” high-speed EMU (of which eight were manufactured in 2000), which took over the Guangzhou-Shenzhen line.

After the Blue Arrow, in 2001, MOR planned to develop a more-advanced high-speed EMU prototype—“the Star of China,” which could reach a top trial speed of 321 kph—to challenge foreign rail technology.[100] China claims that the China Star was a home-grown high-speed system developed by state-controlled manufacturers using only Chinese IP.[101] However, the train suffered from several problems. Its repair rate was higher than the international standard and it experienced serious overheating-bearing issues at top speeds.[102] MOR once again realized that China’s domestic technology was still not good enough, so less than two years later, MOR stated that the core technology was “immature,” and the China Star was thus quietly shunted into a siding.[103] After a prolonged period of extensive forced technology transfers, China debuted the first “Chinese-standard” 400-kph bullet train—the “Fuxing”—in 2016, which it claims uses entirely Chinese technology.[104]

Forced Technology Transfer for Market Access

Forced technology transfers were central to the development of China’s high-speed rail sector—and they continue to be to this day. See appendix 1 for a detailed case study of Kawasaki’s experience with forced technology transfers in China.

During the 2000s, MOR considered going down the same route as Taiwan, whose high-speed rail network is based on Japanese bullet trains.[105] However, China did not just want a high-speed rail system, it wanted its own high-speed rail industry—and massive government intervention to build out a massive domestic high-speed rail system was the means by which it could get it. Contracting with a company to simply sell it rolling stock was not going to help MOR achieve that goal. As Xianfang Ren, chief China economist at IHS Global Insight, stated, “If China chose one system, that would [have meant] it rendered control of the entire railway system to one foreign country.”[106]

So after almost a decade of unsuccessful attempts to develop indigenous high-speed rail technology, in 2003, then-MOR Minister Liu Zhijun decided on a “technology transfer for market access” strategy in which China would make the sale of foreign high-speed rail technology contingent on forming JVs and sharing technology with Chinese producers.[107] Following this, the Central Committee of the Communist Party of China and China’s State Council promulgated a strategy that acknowledged as much in articulating an “overall policy of ‘introducing advanced technology, jointly designing and producing, and building Chinese brands.’”[108]

In line with this, in 2004, MOR Minister Liu Zhijun launched 3 tenders to make some 200 high-speed trains, with each one stipulating that foreign companies had to collaborate with domestic partners and transfer key technologies to achieve localization.[109] MOR assigned two leading SOEs—China South Locomotive & Rolling Stock Corporation (CSR) and China Northern Locomotive & Rolling Stock Industry Corporation (CNR), which later merged to become CRRC—to localize production. For example, the key high-speed rail JVs were Bombardier-Sifang (a CSR subsidiary), Kawasaki-Sifang (CSR), Siemens-Tangshan (a CNR subsidiary), and Alstom-Changchun (CNR). Within three years, Chinese firms started producing high-speed trains based on the foreign technology.

Each tender included two key conditions: (1) to win, the bidder had to transfer technology to China; and (2) the final products had to be marketed under the Chinese SOE rail car brand. Chinese firms not only gained complex and sophisticated capabilities very quickly on the basis of billions of dollars of R&D and engineering of foreign firms, but they also violated licensing agreements whereby they committed to only use the technology domestically, and not for exports. Chinese firms are now selling their illegal clones back into foreign markets in competition with the companies from which they coerced the technology.

Technology transfer contracts typically consist of four components: (1) the joint design of train modes based on foreign technology; (2) access to train blueprints; (3) instructions on manufacturing processes; and (4) training of engineers.[110] Chinese engineers are taught the “hows” of building components and trains a certain way.[111] They therefore must reverse engineer foreign technology if they wish to develop new variations. Chinese firms work with local universities and other research institutions to do this. China has also organized its government laboratories and universities to facilitate this forced tech transfer. MOR and the Ministry of Science and Technology (MOST) have consolidated 11 research institutes, 25 universities, 51 national laboratories and engineering research centers, and the 2 leading state-owned firms (CSR and CNR) and their subsidiaries to participate in these projects.[112] From 2008 to 2010, the National Natural Science Foundation of China sponsored 55 high-speed-rail-related R&D projects, of which 33 were dedicated to absorbing imported technologies and developing new technologies in accordance with China’s goal of substituting foreign sales and IP.[113] A lot of this research went well beyond the typical innovation process in that local firms paid for some foreign patents and drew inspiration from others and used further research to create new inventions.

After almost a decade of unsuccessful attempts to develop indigenous high-speed rail technology, in 2003, then-MOR Minister Liu Zhijun decided on a “technology transfer for market access” strategy in which China would make the sale of foreign high-speed rail technology contingent on forming JVs and sharing technology with Chinese producers.

Bombardier, Alstom, Siemens, and Kawasaki all submitted bids for sales and tech transfer, even though they realized that their JV partners would likely become their rivals outside China.[114] All companies, except Siemens, were awarded part of the initial $1.4 billion in contracts, with the Japanese consortium winning the largest portion (around $800 million) to deliver high-speed trains (detailed in the annex 1 case study on Kawasaki). The firms could fully manufacture the first batch of trains for these contracts overseas while training MOR engineers on their technologies. They would supply full kits—known as a “knock-down kits”—from overseas to be assembled in China to further train MOR engineers and staff. Finally, the contracts required foreign firms to partner with key suppliers to transfer component technologies for their manufacturing.[115]

For example, Alstom’s JV was chosen to supply 60 regional trains, 180 locomotives, and other equipment in a contract worth over $1.4 billion.[116] Alstom initially planned to provide three full imported trainsets, then six completely knocked down trainsets with 100 percent imported equipment to be assembled in China, and finally, 51 domestic trainsets, with 65 percent locally made content.[117] However, MOR subsequently skipped the use of the knocked down trainsets, instead requiring four of them be made domestically. Alstom provided 10 key technologies, trained over 500 staff, provided hundreds of hours of expert advice per month, and transferred over 25,000 relevant documents. It also supported its JV partner in selecting and developing Chinese component suppliers. Alstom’s own documents outline how it had to localize the sourcing of an increasing range of key components as part of its trains, moving from interior components to the battery and motor and finally to the traction motor, brakes, gear box, and other complex items.[118]

Alstom’s experience in China has since been rocky. China’s then MOR decided to operate the trains from the initial contract at 250 kph (instead of the recommended 200 kph) and did not do the recommended maintenance, leading to technical issues. In 2011, after former MOR Minister Liu Zhijun was replaced, MOR reduced those speeds to 200 kph. Ultimately, China did not sell any of those trains outside of China. Since then, Alstom has been effectively shut out of the high-speed rail market in China. In 2012, a presentation by Laurent Jarsale (Alstom’s vice president for high-speed rail products) made Alstom’s position clear, as thereafter, it refused to transfer technology for very-high-speed trains.[119] Alstom does maintain ongoing JVs in China focused on the metro rail, components, and signaling markets.

These forced foreign technology transfers helped China catch up quickly and allowed the country to move to the next stage of industrial development and ratchet up restrictions to force out foreign firms and their products. Indicative of this, by 2010, executives at foreign high-speed rail firms estimated that roughly 90 percent of the high-speed technology used in China was derived from partnerships or equipment developed by foreign companies.[120]

So why did foreign companies do enter China and hand over their technology? One reason is they failed to anticipate China catching up as quickly as it did. Executives from Siemens and Kawasaki, for example, did not expect Chinese companies to be a competitive threat for many years, maybe decades.[121] A Financial Times article quotes a Japanese executive familiar with the 2004 deal saying that although members of the consortium realized the deal could help give China a start in the industry, they “could not imagine” the catch-up would be so fast.[122] As academics Dan Prud’homme and Max von Zedtwitz, “This highlights the dangers of collaborating with Chinese companies that are supported by the state, learn quickly, upgrade their technological capabilities, and have an uncanny ability to quickly scale up operations.”[123] This is not to mention dealing with a nation and its enterprises that have absolutely no compunction whatsoever of pilfering foreign technology and IP, often in direct contravention to the nation’s WTO commitments.

But the real reason the firms did this was because they felt they had no real choice. Executives from Siemens and Kawasaki were both eager for contracts and feared that if they didn't do deals with China, their competitors would. China had shown its willingness to cut out foreign firms from that massive Chinese market if they didn’t “play ball” (form JVs and transfer technology) in a number of other industries, including telecommunications equipment.[124] Top management was not blind. Foreign rail companies were forced to enter JVs and transfer technology as a condition of market access. And while it makes sense that China would want to do this, given how far behind they were in high-speed rail, this still constituted a violation of WTO rules (which China agreed to in joining the WTO in 2001).[125] Since the WTO prohibits these types of deals, China hides them in informal agreements Chinese government officials and SOEs force on foreign firms (see the case study on hidden market barriers in China’s metro train market). The agreements likely involve other WTO-inconsistent clauses, such as export-performance and local-content requirements, as conditions for investment approval or to obtain a Chinese bank loan.[126]

Forced technology transfers remain a centerpiece of China’s broader rail and high-speed rail development strategy to this day. For example, China’s ongoing requirement for 100 percent Chinese-owned technology in many procurement contracts, combined with foreign firms having to engage with majority-Chinese owned JVs in order to submit a bid, amounts to a de facto mandate to transfer technology to local partners. Foreign firms continue to capitulate because they have no choice—they either give up their technology or lose out to other competitors in the growing Chinese market.[127] The massive purchase of rolling stock, signal systems, and related equipment is something no foreign rail producer can afford to ignore. Looking at the growth of the Chinese market, foreign firms can hardly resist such a Hobson’s choice, knowing that if they do resist, China will award the contract to a competitor that is hungrier for short-term sales—and China still gets the technology. In essence, these firms face a monopsonistic buyer as the Chinese government, rather than private companies operating rail systems, dictates contracts and purchases.

Forced technology transfers remain a centerpiece of China’s broader rail and high-speed rail development strategy to this day.

However, China’s use of forced technology transfers is a double-edged sword as it will force CRRC (and other firms) to reveal details of its technology—even possibly that it made limited changes to technology transferred to it by its foreign partners—when it seeks to protect its IP in other countries.[128] This raises a central point of tension and conflict between Chinese and foreign rail firms—China’s high-speed rail sector has faced repeated and ongoing claims of patent infringement, especially by Japanese firms. China has responded to claims of IP theft related to high-speed rail by saying that they’ve simply surpassed their designs and continued to innovate further.[129] Despite its repeated claims over the last decade that its high-speed rail technology is homegrown, in 2010, media reports state that the then MOR organized a team of lawyers and officials to investigate how vulnerable Chinese rail companies would be to IP lawsuits when they start selling in international markets.[130] Indicative of this, in 2011, Tadaharu Ohashi (former chairman of Kawasaki Heavy Industries ) told Japan's Asahi Shimbun newspaper that his company would launch a lawsuit if China violated its IP rights. “The Chinese government promised it would use the technology only inside China.”[131] Despite these concerns and threats, there have not been any reported legal cases involving foreign firms challenging Chinese firms seeking to apply for patents in their home or third-country markets.

Massive Financial Support for Domestic High-Speed Rail Firms

Forced tech transfer is not enough to ensure Chinese firms are competitive; China also uses massive subsidies (most of them WTO-illegal) to build its domestic market and firms. Indeed, China’s firms competing in advanced-technology industries depend on a vast array of subsidies. Preferential debt financing and other direct and indirect financial subsidies are critical to the domestic and global success of China’s rail sector, especially its high-speed rail firms. For example, Chinese rail firms and its national high-speed rail operator have taken on tremendous amounts of state-supported debt. For example, CSRG’s debt surged over sevenfold from $70 billion in 2005 to over $558 billion in 2017, much more than many countries’ national debt.[132]

Thanks to the uneven playing field these financial subsidies create, Chinese rail firms are not constrained by the usual concerns for profits that firms in other nations are under. An unnamed senior executive at a foreign rail company said in an interview: “Alstom, Kawasaki Heavy Industries, and Siemens are not banks and do not have the political influence or the full weight and money of the state behind them in the way the Chinese rail companies do.”[133]

CRRC is the key beneficiary of China’s financial largess. It is quite the understatement for CRRC to state (as it did in a financial report) that a reduction in government subsidies would have a “definite negative impact on the company’s business results and financial position.”[134] In terms of direct financial support, CRRC is one of the most heavily subsidized companies in China. In its listing announcement on the Shanghai Stock Exchange, CRRC noted that it received $194 million in government subsidies in 2014 and an additional $268.7 million in 2015.[135] CRRC’s English language annual reports show that it received approximately 243 million RMB (about $34 million) in “government grants” in 2018 and 994 RMB (about $140 million) in 2017. CRRC also receive extensive R&D subsidies. As 1 of the 10 sectors China targets under Made in China 2025 strategy, firms involved in advanced rail technology also receive preferential R&D support in the form of subsidies and tax incentives. China also reduced the income tax rate for high-tech industries from 25 percent to 15 percent and raised the rate of additional deductions of R&D expenses from 50 percent to 75 percent.[136]

Thanks to financial subsidies, Chinese rail firms are not constrained by the usual concerns for profits that firms in other nations are under.

CRRC also receives direct financial backing from Beijing worth orders of magnitude more than the “government grants” listed in its English language annual reports. Radarlock’s 2019 report “CRRC and Beijing’s Dash for Global Rolling Stock Dominance” details how Chinese financial statements list far more.[137] CRRC’s Chinese financial documents report more than 5.4 billion RMB (almost $800 million) in direct subsidies since 2015, with 1.37 billion RMB (approximately $191 million) in 2018 alone.[138] Even this likely represents an incomplete picture of direct government support, as company financial documents also acknowledge government subsidy contributions to “non-operating income,” “other receivables,” and “other cash received relevant to business activities.”[139]

It is difficult to estimate the full picture of Chinese government support, considering the indirect subsidies provided via tax cuts for R&D for firms in related strategic industries, the limited incentive to publicly report government financial support, and the ease with which China can direct unreported funds to entities it owns and controls. For example, CRRC leads China’s drive for innovation in high-speed rail and runs government-supported national engineering laboratories. In 2017, CRRC was designated as the lead on the National High-Speed Train Technology Innovation Center. The company benefits from significant state support for R&D. Since 2016, it has led the Special Project in Advanced Rail Transit, through which it won R&D projects worth at least 433 million RMB (around $68 million) in 2016; 44.21 million RMB (around $6.8 million) in 2017; and 85.27 million RMB (around $13.1 million) in 2018—more funding than any other entity involved in China’s National Key R&D program.[140]

Chinese high-speed rail firms also benefit from the massive amounts of debt involved in building and supporting China’s high-speed rail services, many of which are unprofitable.