1.1 Overview of the Company and its Businesses
- Company Description
China South Locomotive & Rolling Stock Corporation Limited (CSR) is a majority-state owned (55%) corporation engaged in manufacturing, refurbishing and leasing rail transportation equipment. Its products include locomotives, passenger coaches, freight wagons, rapid transit vehicles, multiple units and related components. It is also engaged in technical and information consulting and other businesses utilizing its proprietary rolling stock technologies such a manufacturing of wind-turbines and hybrid buses.
As of 2010, it has 16 wholly-subsidiaries operating in 10 provinces and cities throughout China with over 80,000 employees. With a production capacity of over 800 locomotives (as of 2010), it is the world's largest manufacturer of electric locomotives. It is also China's largest manufacturer of rapid transit vehicles.
- Brief History
CSR, in its present form, is a relatively new corporation, created in 2007 just four years ago. However, it traces its roots back to the very first locomotive and rolling stock manufacturer in China established over 100 years ago. In 1949, the Manufacturing Bureau of the China's Ministry of Railways was established to manage and direct CSR's predecessors. For over 35 years, CSR's predecessors remained part of the bureau, which itself had undergone two major restructuring to become the General Manufacturing Bureau in 1966 and the General Industry Bureau in 1975. It was only in 1986 that China Locomotive & Rolling Stock Industrial Corporation (LORIC), one CSR's parent predecessors, was established as a distinct organization. In 2002, LORIC was separated from the Ministry of Railways and China South Locomotive & Rolling Stock Group Corporation, CSR's parent and wholly-owned by the government, was established. It is in the same year that the group manufactured the China Star, a high-speed electric multiple unit with top speed of 270 km/h. Finally, in 2007, CSR was established and made its initial public offering in 2008. It is currently traded in both the Hong-Kong Stock Exchange and Shanghai Stock Exchange.
In 2010, CSR signed a deal with General Electronics (GE) to manufacture high-speed trains in the United States. It is also in the running to win a contract to manufacture high-speed trains in Britain.
- Recent Financial Performance
From 2008 to 2009, a time when many companies were reeling from the effects of the global financial crisis, CSR's revenue grew by 30% to around USD 7 billion while its net profit went up by 26% to around USD 322 million. Within the same period it invested almost USD 400 million in R&D and acquired export contracts valued at around USD 1.2 billion. As of March 2011, its market capitalization is approximately USD 12.5 billion (which makes it over 20% bigger than PLDT, the Philippine's largest publicly-traded corporation in terms of market capitalization). The table below summarizes the mentioned financial indicators.
Table 1.1 Financial Indicators
| Financial Indicator |
Value (in USD millions)
|
| Revenues |
6,944.00
|
| Net Profit |
322.00
|
| Market Capitalization |
12,546.00
|
| R&D Expenditure |
398.80
|
| Export Contracts |
1,199.97
|
CSR's different export destinations and their corresponding contract amount are enumerated in the table below.
Table 1.1 Export Contacts (2009)
| Export Destination |
Contract Amount (in USD millions)
|
| Asia |
644.63
|
| Central & South America |
295.47
|
| Africa / Middle East |
208.00
|
| Commonwealth of Independent States |
21.73
|
| North America |
20.66
|
| Western Europe |
6.42
|
| Oceania |
3.06
|
| Total |
1,199.97
|
From the figures presented in the above tables, it clear that CSR, despite being majority-state owned and a relative new-entrant in the global market, has a healthy, profitable business and a globally-recognized brand.
1.2 Overview of the Country and Industry Context
- China & the Railway Industry
With a population of over 1.3 billion people, China is the most populous country in the world and with total land area of a little less than 9.6 square kilometers it is also the fourth largest country in the world (behind the Russia, Canada and the U.S.). For over 3 decades, its economy has been growing at average rate of about 10% making it the 2nd largest economy (excluding the E.U.) in the world in 2010 with a GDP of over USD 9.8 billion (in P.P.P.) With its size and the rapid development and urbanization of its various regions and city clusters, it is, therefore, of little surprise why its government considers the railway industry one of its most important and strategic industries in the next 10 years. In fact, as of 2010, China's has about 77,834 km of operational railroads and intends to increase it to 120,000 km by 2020.
- Railway Transport Equipment Manufacturing Industry
The Railway Transport Equipment Manufacturing Industry in China is valued at over USD 13 billion. It is regulated and directed by the Ministry of Railways (MOR), which is also CSR's largest domestic customer. CSR's major competitor in the domestic market is China CNR Corporation Limited (formerly known as China North Locomotive and Rolling Stock Industry (Group) Corporation.) Between the two of them, they account for almost 100% of the entire domestic market. In the global market, CSR’s main competitors are Germany's Siemens, France's Alstom and Canada's Bombadier. While the global market is currently dominated by these three (together, they account for 55% of the global market ), recent trends and reports (discussed in the previous sections) indicate that CSR is catching-up fast and poised to eclipse one of the big three possibly within the next three years.
Over the next 10 years, growth in the domestic market is expected to be driven by several factors including 1) the MOR's Mid- and Tong- term Railway Network Plan (2008 revision), 2) China's accelerating urbanization and rapid economic growth, 3) the government's energy-saving and emission-reduction strategies, and 4) preferential and favorable state policies. Possibly the single most powerful domestic growth driver for the industry is the MOR's Mid- and Tong- term Railway Network Plan. The plan intends to significantly increase the total length of China's operational railways from less than 80,000 km in 2010 to 120,000 km in 2020, of which 50% will be double tracked and 60% will be electrified. Furthermore, it calls for the separation of passenger and freight for major high-traffic lines and mandates that transport capacity meet the needs of economic and social development. Furthermore, it directs that by 2020 main technical equipment in the domestic market should reach or get close to “international advanced level”. Another significant growth driver for the industry is the rapid urbanization and economic development experienced by different regions (such as the Yangtze, River Delta, the Pearl River Delta, Bohai Bay, Chang-Zhu-Tan and Cheng-Yu) and city clusters (such as Wuhan City Circle and Guanzhong-Tianshui) in China. As of 2009, there have already been 25 approved urban plans calling for investments amounting to RMB 1 trillion (USD 152 billion) for the development of various rapid-transit systems by 2016. Investment of this magnitude makes China the largest rapid-transit system construction market in world and is expected to drive industry growth well into the foreseeable future. The government's energy-saving and emission-reduction strategy is another growth driver. Accounting for only 1/5 of the energy consumed by the entire transportation industry while carrying half of the total traffic volume, railway, especially electrified railway, is a green, eco-friendly mode of transportation. It generates much lower emission and air pollution compared to land- and air-based transportation. Furthermore, it also bears lower social cost i.e. traffic jams, accidents making it specially aligned not only to the China's energy-saving and emission-reduction strategy but also the global trend towards green industry and transportation. Finally, China's preferential and favorable polices towards the industry such the “Accelerating Adjustment and Stimulus Plan of Rolling Stock Manufacturing Industry” and various tax exemption, refunds and incentives ensure sustainable domestic industry growth.
Globally, due to trends toward green transportation, CSR expects global railway industry, long considered to be a sunset industry, to undergo a re-vitalization. According to CSR, the rolling stock industry of various countries around the world is either undergoing or will undergo a phase of overhaul. It intends to ride this wave to expand its international presence and capture a bigger piece of the global market.
1.3 Company Vision, Goals, and Attitudes Regarding Technological Learning and Catch-up
- Vision & Goals
In the next three years, CSR envisions itself among the global market and technological leaders in the industry. Borrowing from G.E.'s business philosophy, it aims to become either the first or the second in terms of market share in every segment of the industry that it competes in and in doing so become the number one railway transport equipment manufacturer in the world (currently, it is already the largest electric locomotive manufacturer). It intends to achieve this by continually “making top products, possessing the best techniques and training the most talented staff.”
As the technology leader, it also envisions itself as the leading provider not only of green transportation but of green technology in general. It aims to provide its customers “with the most valuable green products and to strive to make itself a most socially responsible leader of the industry.”
- Attitudes Regarding Technological Learning and Catch-up
CSR demonstrates a clear understanding of the significance of technological learning and catch-up in its long-term success and that of its various businesses. This understanding is reflected in its investments in R&D and human resources, in the vision of its leaders and in its organizational culture as a whole.
In 2009, CSR invested about USD 400 million in R&D giving it an R&D spending-to-sales ratio of 5.7% (in terms of this indicator, CSR is in the same ballpark as Apple, Google, 3M, GE, Toyota, Microsoft, P&G, IBM and Samsung; companies universally recognized as among the most innovative in the world.) It launched over 404 new R&D projects and continued 304 existing ones. In recognition of its scientific and technological achievements, it garnered numerous awards and prizes from national S&T award-giving bodies including the State Scientific and Technological Progress Award and the Science and Technology Award of China Railway Society. Also in 2009, it was granted 554 national patents and applied for 718 more.
Beyond the sheer magnitude of CSR’s financial investment into R&D, its remarkable R&D results are made possible by a culture and system of innovation that is both ingrained and fundamental to the entire organization. As of 2011, CSR has 1038 doctorate and master degree holders working in 14 interactive R&D centers including the National Engineering Research Center for Converters, the National High-Speed Multiple Units Engineering Laboratory, five National State-Accredited Technology Centers, four Post-doctoral Working Stations, two Research Institutes and its Overseas Industry Electric and Electronic R&D Center (established in the U.S. in partnership with University of Michigan.) Directing and coordinating CSR’s numerous R&D centers is the CSR Technical Specialist Committee.
CSR’s appreciation on the importance of technological learning is also apparent in the vision and words of its leaders. In various statements and press releases, its leaders have repeatedly emphasized the central role of technology and technological learning in CSR. For instance, in his annual statement to the shareholders CSR’s chairman spent a significant portion discussing technological milestones achieved by CSR during the past year. He highlighted CSR’s mass production of 350 km/h independently developed multiple units, its rapid development of 7,200kW six-axles high-powered electric locomotives which took only six months from design to market introduction, its successful testing and verification of 9,600kW six-axles high-powered electric locomotives and 6,000HP high-powered diesel. Furthermore, he also highlighted that “CSR has nurtured over 10,000 young engineers and caliber management born in the 60’s, 70’s and even 80’s.” He noted that in less than a decade, the projects they have undertaken have outnumbered those “undertaken by their predecessors in their entire lives” and that they are “set to become top-notch, world-class experts’ in the industry and “hold the future of CSR.” Moreover, in CSR’s website, CSR’s Chairman and President, in their individual statements, touched both on the role and importance of technology in CSR’s future and their vision of CSR catching-up with the industry’s global technological leaders and becoming a technology leader itself. All these demonstrate not merely an understanding of the importance of technological learning and catch-up but also a sense of pride in their organization’s technological capabilities.
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