Written by: David Nahass, Financial Editor Railcar buyers are frequently of habit. It stands to reason. The costs of operating a railcar for moving a commodity are generally transportation, rent or debt expense (unless the asset is owned outright by the end user) and maintenance expenses. Additionally, anyone using a railcar wants to insure that the car will perform well. Try a new valve in your tank railcar and risk loading or unloading problems or even worse a car that leaks commodity in transit? No thank you sir! For years, railcar buyers and fleet and maintenance managers that make the decisions about the components that are used to manufacture railcars were purely a “Buy American” crowd. They had history on their side when making these decisions, because the railroad industry is littered with safety-related recalls on components manufactured outside the U.S. Why the history lesson? As new railcar orders flounder amid decreasing loadings, high system velocity, a strong dollar and stagnant global economies, new entrants into the manufacturing marketplace have surprised (positively and negatively) the existing manufacturers, many railcar lessors and even some customers. The most out-in-front company is Vertex Railcar Corp. Based in Wilmington, N.C., Vertex began production early in 2016. Vertex has an interesting pedigree for a railcar builder in North America. Its primary investor is CRRC Corporation Ltd. CRRC is the Chinese state-owned company that came into existence after the merger of two other Chinese state-owned companies: CSR (China Southern) and CNR (China Northern). Vertex is China’s first direct entrance into the U.S. freight car manufacturing market. Vertex’s website says that it is the “first new large-sized railcar manufacturer in 82 years, where there are only six main competitors in the industry.” Vertex’s entrance has caused quite a stir in the market. Certainly, the plans to enter the U.S. market were conceived in the latter part of the bull market for railcars tied to CBR and hydraulic fracking. While North American manufacturing moved to a production high of 80,000 units, adding additional capacity for a pie that might have seemed like it would never stop growing seemed like a great idea. However, as production moves to the 50,000s in 2016 and likely 20% to 30% lower in 2017, adding manufacturing capacity is rubbing people the wrong way. Layer on top of that a complex global economic puzzle, and China’s entrance into North American rail looks like a creative way to dump Chinese steel, take American jobs and potentially create another safety-related recall that will have to be managed sometime in the near future. The unspoken part of the puzzle here is that foreign-made componentry has been a significant part of North American railcar production for more than a decade. Parts used in truck components and in manufacturing have been and continue to be cast in China and shipped to the U.S. For example, in the AAR field manual, there are codes that specify where a casting is made so that if there is a systemic failure of a series of castings, those casting can be identified and removed from service. The AAR field manual has codes for, among others, the U.S., China and Mexico. How ubiquitous is the use of Chinese parts? I spoke with Art Lewis, who retired from American Electric Power (AEP) and now runs AELewis Railcar Management Services. Art placed his last new car order on behalf of AEP in 2006. He told me that when specifying componentry for aluminum coal cars, he “would always spec (require in the specification of a railcar) American-made components.” As the manufacturers began to source more and more railcar from China, Art notes, “It got to a point where you could no longer control where the parts were coming from.” This is not to put down or judge the economic decisions made by railcar manufactures and component suppliers. We’re all adults here: Components are (and were) not being sourced from China for any reason other than price. Whatever the reason, the rail industry needs a vibrant manufacturing community that can survive the volatility swings that move a market to double and then halve manufacturing totals in a six-year span. In the cyclical downturns in the early 2000s, many component suppliers were squeezed on price until they were either merged or driven out of business. That’s not good business for anyone. Many industry observers would say the same thing about adding manufacturing capacity during a cyclical downturn. Considering the momentum, depth and secular loadings shift in this downturn, that seems like a true statement. That’s not a China issue by any means. Continue reading...
