OTTAWA — The trains in Germany aren’t running on time, and Bombardier Inc. is to blame, according to the National Post.
That’s the contention of Deutsche Bahn AG, a German rail operator, which says problems with Bombardier and other suppliers, including Siemens, have resulted in delayed deliveries of new trains and technical problems, the Frankfurter Allgemeine Zeitung newspaper reported yesterday. As a result, Deutsche Bahn can’t always stick to its timetables.
The contract dispute is a telling example of the sorts of hazards facing the company as it increasingly depends on its railcar division to lead growth this year.
Europe is the world’s most lucrative railcar market, and Bombardier is one of the three largest players on the continent, along with Siemens and Alstom.
Over the past decade, the three companies have consolidated the European market, which until recently was made up of state enterprises immune from outside competition. But the industry is still wracked with overcapacity, and inhibited from closing plants by political pressure and labour-friendly laws.
“Most of the major European rolling-stock manufacturers have been struggling to meet profitability” says Robert Preston, assistant editor of London-based Railway Gazette International.
While manufacturing has been privatized and consolidated, the main customers for railcars remain governments. And each of them seems to have a different set of specifications for what it wants to run on its rails.
While Bombardier produces a standard line of regional and business jets, which allows them to rationalize costs and standardize manufacturing processes, “there aren’t two similar subway cars in the world,” says Kenton Freitag, an analyst with Standard & Poor’s. “The non-standardization brings different types of risk.”
That means Bombardier — whose railcar division is expected to book $8-billion in revenue this year — is constantly dealing with new designs on new products, a labour-intensive process that brings the risk of delays, technical problems, cost overruns and contract disputes.
Last fall, for example, Bombardier sued American rail operator Amtrak for more than $200-million in damages, blaming Amtrak for delays and cost overruns in a project to produce and deliver high-speed Acela Express trains. Amtrak in turn accused Bombardier of mismanagement performance failures, “self-inflicted financial losses” and failure to meet the terms of their agreement.
In Europe, the company faces the added complexity of pro-labour laws. They make it more difficult for the company to lay people off, reducing the flexibility to deal with the ebb and flow of orders, says Canaccord Capital analyst Bob Fay.
As a result, earnings are slim to none, and don’t show any sign of improving. In the past five years, the company has posted margins before interest and taxes of between 1.5% and -1.5%.
The railcar business faces further challenges in the wake of Bombardier’s decision earlier this month to sue DaimlerChrysler after buying the auto giant’s Adtranz railcar unit last year. Mr. Fay said Bombardier’s revelation the company will have to pay out $600-million to $700-million to cover underperforming Adtranz contracts could hurt the division’s ability to improve margins over the next few years.