Bombardier déjà vu

The company is poised for a rail revival, but staying on top is about good politics as much as shrewd business.

It was 1973 when Bombardier started building rolling stock. The Arab oil embargo had caused fuel prices to soar, and the company was forced to halve production of its snowmobiles. The CEO at the time, Laurent Beaudoin, began looking for a way to diversify into a counter-cyclical type of manufacturing. The high price of fuel was driving interest in public transportation, and it happened that Bombardier had inadvertently acquired Lohnerwerke, a company that built trams in Vienna, as part of a deal to take over the engine manufacturer Rotax. Bombardier had no experience in public transit and was not keen to take on the company at the time, but it turned out to be an auspicious move.

Following the urban population explosion of the 1960s, the mayor of Montreal, Jean Drapeau, took on a variety of upgrades to his city’s infrastructure, including the construction of the Montreal metro. Urban development continued into the early 1970s when the government began funding public works in an effort to boost employment during the economic downturn.

In 1974, the City of Montreal approached Bombardier to see if the company would be interested in bidding on the second generation of cars for the city’s transit system. Beaudoin won the contract and beat out his more experienced British-owned competitor Canadian Vickers, the company that built Montreal’s first generation of cars. Did the Quebec government favour an ailing, homegrown snowmobile company, with virtually no experience producing train cars? The critics said so, but either way, Bombardier scooped up one of Canada’s most coveted public works projects.

The central conundrum of rail in North America is whether it is a business or an arm of government. It is very difficult to distinguish the industry’s business model from expectations regarding the government’s willingness to subsidize and play favourites. That was true in 1974, and it is still true today; and while the present economic conditions are similar to the ones that led Bombardier to go into the mass transit business in the first place, the company’s position has changed considerably. As a global leader in an industry dominated by political calculation, the company finds itself playing a double game of defending protectionism at home, while simultaneously championing free trade abroad.

Here in Canada, Bombardier is bidding on a contract to replace cars in the Montreal metro. And again, the cozy relationship between the Quebec government and Bombardier is the subject of controversy, with foreign competitors accusing the Quebec government and the Société de transport de Montréal of giving Bombardier preferential treatment. At the same time as Bombardier is fighting foreign competition on their home turf, they are vying for a piece of the $8-billion stimulus package that has been allocated to rail in the United States. These funds are subject to Buy American legislation, which would require Bombardier to build up its manufacturing presence in the U.S.

All of this comes as many analysts are predicting another wave of development in ground transportation across North America. The American and Canadian governments have staked out policy to improve passenger rail, and people in the industry in both countries think that the current rail boom is the sign of a long-term growth trend.

Bombardier would appear to be well positioned for a new “golden age of rail,” but there are skeptics who point to low ridership numbers on trains and the prohibitive cost of development as reasons that the renaissance in rail will never materialize.

In Canada, there is between $600 million and $1 billion of federal money going into ground transportation projects, according to Michael Roschlau, president and CEO of the Canadian Urban Transit Association. These federal dollars are in addition to the $4-billion Infrastructure Stimulus Fund formed through the Economic Action Plan — some of which will go to improving rail. The Canadian government’s investment is not just a reaction to the economic downturn, says Roschlau, but rather a long-term response to the growth of cities, limited road space, environmental awareness and rising fuel costs.

In the U.S., President Obama has committed $8 billion in stimulus funds from the American Recovery and Reinvestment Act to the improvement of passenger rail. In addition, he proposed in the 2010 budget to allocate a grant of $1 billion a year for five years to the development of high-speed rail.

Many people in the industry say they believe these funds are going to jump-start what will be a long-term commitment to developing rail. William Millar, president of the American Public Transportation Association, argues that high fuel prices, an aging and increasingly urban demographic, rising concerns about global warming and U.S. reliance on foreign oil are all working to generate greater interest in public transportation. “With so many trends favourable to rail transit, we are going to need to expand dramatically passenger rail infrastructure,” he says.

Millar predicts that there will be an effort over the next 10 years to tie the whole transportation sector together by creating a complementary network of rail, roads and air. Intercity high-speed rail will free up the aviation industry to make longer, more profitable flights, and hooking the rail network up with airports will allow for travellers to make a smooth transition between modes of transportation.

The use of interoperable equipment such as rolling stock and signalling would make it possible to connect the rail hubs in the United States. For instance, the use of a locomotive that could switch from diesel on the less-travelled New England track to electric on the higher-speed megalopolis line would allow passengers to connect from the New England corridor that links New Haven, western Massachusetts and Vermont to the northeast corridor that connects Boston, New York City and Washington, D.C., without transferring. Bombardier currently has a dual-powered locomotive in its product pipeline that would make combining routes on diesel and electric track possible.

The company is similarly well-positioned in Canada. In 2008, Bombardier received an order from Montreal’s Agence Métropolitaine de Transport (AMT) to provide 20 dual-powered locomotives to the Montreal commuter rail system. These cars are well-suited to Montreal because of the restrictions on using diesel-powered trains in downtown tunnels. Dual-powered locomotives would allow the trains to be electric and non-polluting in the city, and diesel on outbound tracks. Bombardier aggregated two of its customers by having the AMT partner with New Jersey Transit. The two agencies have similar infrastructure issues, and together they can purchase the cars at a lower cost.

The diesel-electric train is one instance of Bombardier’s size and technological expertise giving them a clear lead in North America. “We’re the first one in the U.S. to have a dual-powered locomotive,” says Bob Furniss, VP for business development and sales for Bombardier Transportation in the U.S. “It’s an edge.”

But there are storms on the horizon, brewed up by the always-uncertain political winds. Bombardier was granted a $3-billion contract to replace the Montreal metro cars, but the bidding was reopened when a foreign company claimed Bombardier got the contract because of favourable treatment from the Quebec government.

In 2006, the province began negotiating exclusively with Bombardier without issuing an invitation for bids, based on the assumption that it was the only company that could supply rubber-tired cars. The French company Alstom contested this claim, and the Quebec Superior Court upheld their case. After considerable pressure from the government, the two companies decided to work together and submitted a joint bid in 2008.

Then, at the end of 2009, the Chinese company Zhuzhou Electric Locomotive threatened to take legal action, claiming that the Quebec government did not publicize the call for tenders. The Société de transport de Montréal ceased talks with Alstom-Bombardier and issued a call for bids. They received proposals from Zhuzhou and the Spanish firm Construcciones y Auxiliar de Ferrocarriles (CAF).

Alstom-Bombardier warned the city’s transit authority that CAF would be unable to deliver on such a large order. The consortium added that prolonging the bidding process could have “disastrous consequences” for the transit system. After Bombardier’s annual meeting in Montreal on June 2, president and CEO of Bombardier Inc. Pierre Beaudoin and president and COO of Bombardier Transportation André Navarri made a statement saying 12,000 jobs will be threatened if the contract isn’t granted to the consortium.

Even if it wins this contract, Bombardier faces an even trickier political problem in the U.S. And it is compounded by the worry that any investment it makes might not be economically sustainable.

Karen Rae is the deputy administrator at the Federal Railroad Administration in the U.S. In December 2009, Rae met with several large manufacturers, including Bombardier, to discuss the stimulus contracts. She told those assembled that the U.S. government is looking to increase manufacturing and assembly jobs. The rail stimulus funds are subject to the Buy American provisions in the U.S., which require that 60% of the value of the rolling stock be sourced in the U.S. and that the final assembly of the cars happen there. Rae is adamant. “Buy American is going to be a high priority. I doubt there will be any waivers,” she says.

But Bombardier won’t increase manufacturing capacity in the U.S. until it is confident the demand will be sustainable. “Bombardier will expand its factory presence based on market demand,” says Beaudoin. “Consistent investment in passenger rail over the long term, as opposed to the feast or famine situation which has been the experience in the United States, will be critical to building a strong U.S. passenger rail network and manufacturing industry.”

But some people who are skeptical of the trend toward developing rail transportation argue the renewed interest in rail might be nothing more than the feast phase of the inevitable cycle, and that current demand for rail equipment is not sustainable. Joel Kotkin, author of The Next Hundred Million: America in 2050, refers to the development of high-speed rail as “the current attempt to drive a 21st-century country back to a transportation model more appropriate for the 19th.”

He contends that urban transit systems benefit only people who work in the downtown core, which in a city like L.A. or Phoenix is only 2.5% to 3% of the population. Now that 80% of U.S. employment involves a commute from one suburb to another, says Kotkin, the model of suburbs as bedroom communities for urban centres is no longer applicable.

“So you’ve got to ask yourself a question,” says Kotkin. “Are we essentially going to put an enormous amount of money into a system so maybe a few yuppies will take it?”

Wendell Cox, principal of the website Demographia and a three-term member of the L.A. County Transportation Commission, says the percentage of the American population who use public transit has fallen from 2.8% in 1980 to 1.6% in 2007. The most recent data are for 2008, when the cost of fuel spiked and ridership went up to 1.8%.

Cox says that all of the proposed rail lines “will lose money hand over fist.” The $8 billion from the Recovery Act would cover less than one-fifth of the cost of developing a line from Anaheim to San Francisco, which California’s High-Speed Rail Authority estimates will cost $43 billion, says Cox. It’s difficult to get a firm number on how much Obama’s high-speed rail plan will cost. The Federal Railroad Administration did not respond to a request for the projected cost of developing the proposed high-speed rail corridors, but in a Cato Institute report titled High-Speed Rail is Not “Interstate 2.0” Randal O’Toole says it will be at least $90 billion.

Bombardier is faced with a difficult question: Is the current interest in rail a signal of a major shift in the dominant mode of transportation, or merely a passing fad? If they bet wrong, they will be forgoing billions of dollars in contracts on the one hand, or saddled with a manufacturing surplus on the other. In spite of the company’s leading position in the world transportation market, Bombardier will still need support from the Canadian and American governments to benefit from the surge in rail development. Looking for sustainability in a cyclical and heavily politicized industry is one of the contradictions inherent in being a giant in transportation, like having to defend protectionism at home and criticize it abroad.