University Transportation Center Research Project Assessing the Economic Impact of High Speed Rail: Focus on Manufacturing Final Report HIGH-SPEED RAIL MARKETS, INFRASTRUCTURE INVESTMENTS AND MANUFACTURING CAPABILITIES By Vivek Ghosal Contract with Research and Innovative Technology Administration (RITA) In cooperation with Georgia Transportation Institute / University Transportation Center Disclaimer: The contents of this report reflect the views of the author(s) who is (are) responsible for the facts and the accuracy of the data presented herein. This document is disseminated under the sponsorship of the Department of Transportation University Transportation Centers Program, in the interest of information exchange. The U.S. Government assumes no liability for the contents or use thereof. The contents do not necessarily reflect the official views or policies of the Research and Innovative Technology Administration, Georgia Institute of Technology, Georgia Tech Research Corporation or the Georgia Tech Applied Research Corporation. This report does not constitute a standard, specification, or regulation. HIGH-SPEED RAIL MARKETS, INFRASTRUCTURE INVESTMENTS AND MANUFACTURING CAPABILITIES Dr. Vivek Ghosal Professor, School of Economics Georgia Institute of Technology Report submitted to the University Transportation Center Georgia Institute of Technology September 21, 2012 1 Acknowledgements This project was funded by a grant from the Research and Innovative Technology Administration, U.S. Department of Transportation, and the University Transportation Center, Georgia Institute of Technology. I am deeply indebted to Professor Michael Meyer for giving me the opportunity to work on this important and interesting project. I greatly benefitted from his insights and guidance, and enjoyed the numerous discussions I had with him on issues related to U.S. transportation and infrastructure investments. My interactions with him allowed me to blend my personal research interests in applied industrial economics, business strategy and capital investments, with the aspects related to transportation investments and the resulting business and economic development. I thank Wen Zheng who provided an enormous amount of research assistance. Without her significant contributions this project would not be completed. She received her MS degree in Economics from the School of Economics at Georgia Institute of Technology in 2012, writing her thesis on high-speed rail investments. Largely as a result of working on this project and her new-found interests in business strategy, Wen is now pursuing her Ph.D. in Business Strategy at the University of Illinois at Urbana-Champaign. 2 CONTENTS 1. Introduction and Brief Overview of Issues, p. 4. 2. U.S Passenger Train History, p. 7. 3. Potential Need for New Passenger HSR Investments, p. 13. 4. High-Speed Rail Categories, p. 19. 5. Investments Needed for HSR, p. 41. 6. International HSR Supply-Chain, p. 61. 7. Multiproduct Firms and the HSR Industry, p. 82. 8. Foreign Firms’ Capabilities in the U.S., p. 109. 9. International HSR Contracts and Partnerships, p. 114. 10. Public-Private Partnerships in HSR Investments, p. 130. 11. Longer-run Dynamic Effects of HSR Investments, p. 151. 12. Buy America Requirement for FRA and FTA, p. 185. 13. Insights from the Industry, p. 189. 14. Implications for U.S. HSR Investments, p. 197. Appendix A: International HSR Contracts, p. 202. Appendix B: Public-Private Partnerships Models, p. 213. Appendix C: International HSR Supply Chain and Components, p. 215. 3 1. INTRODUCTION AND BRIEF OVERVIEW OF ISSUES Driven by increasing demand for passenger transportation and congestion in key corridors in the U.S., such as in California, the Northeast, Florida and parts of the Midwest, the U.S. has embarked on various initiatives to examine alternative solutions to this important problem. One of the initiatives relates to the possibility of either introducing or considerably upgrading high- speed rail (HSR) services. In this report, I focus on this initiative and conduct a detailed study of the HSR industry to provide guidance for policy. The need for new transportation-related infrastructure investments is compelling due to the increasing volume of passenger traffic, and the highly congested state of roads and airports in the key business and passenger corridors in the U.S. One of the contentious issues with HSR investments has been its considerable costs. Given this, any HSR investments call for a careful assessment of its benefits and costs. While the costs are relatively high and transparent, opinions differ considerably on the benefits that HSR investments and service will bring to the U.S. economy as a whole and to the specific corridors in question. Unfortunately there is no simple answer to the calculation of benefits. This is because of the fact that the benefits that may accrue to the domestic economy from HSR investments depend on a wide range of factors such as: the exact route and end-points of service; the distance covered; the presence of local mass-transit systems at the end-points of service as well as at intermediate stops; the specific HSR speeds chosen and the average speed en route; the number of stops; whether the various components can largely be manufactured in the U.S. or do they have to be imported; the existing conditions on road and air traffic; the local and regional business and economic development that may occur due to the introduction of HSR; among others. About the only thing that is clear from this list is 4 that it is extensive. This explains the widely divergent views on the actual benefits that HSR may bring to specific U.S. routes. Overall, the calculations of the net benefits of HSR are complex. A somewhat different way of looking at the problem is to ask whether the rail service by itself needs to be profitable? Many ardent supporters of rail (and HSR) tend to argue that rail service by itself does not have to be held to a profit-making standard. This is because of the significant external benefits that may result from HSR-related infrastructure investments and the service. Some of these external benefits may accrue from the economic and business development, and growth, that may result. The critics, in effect, take a profitability standard for the rail investment and service alone. They question the assessment of benefits, arguing that they may tend to be low and highly uncertain, and this is traded-off against almost certain high costs. The critics, therefore, advise against HSR due to its potential loss-making characteristic. The objective of this report is not to attempt to directly answer the questions or resolve the complex disagreements. The objective here instead is to gain a deeper understanding of the HSR industry which is dominated by prominent global players, and one where the U.S. currently has little or no comparative advantage due to the lack of this industry in the past. This however does not imply that the U.S. firms cannot develop expertise in specific areas, spur growth, and form profitable alliances and partnerships with the global heavyweights to meet the U.S. investments and services needs. To understand the core issues and potentially provide an answer to the overall HSR investment feasibility question, we need to study the international trainset suppliers, examine the components’ supply-chain, the nature of contracts that have been observed in the recent past, the types of partnerships that have formed, do case studies of the economic and business development that have occurred in other countries, and then make an assessment of potential benefits that may accrue to the U.S. As noted above, the costs are 5 somewhat clearer. Since the benefits picture is more uncertain and complex, I primarily focus on making an attempt to clarify some of the complexities that lie at the heart of the potential benefits question. This deeper understanding of the HSR industry may help formulation of appropriate HSR investment policies. This report is organized as follows. In section 2 I take a quick look at the history of U.S passenger train industry. In section 3 I examine the potential need for new passenger HSR investments to meet growing demand for transportation and to alleviate congestion in several key corridors in the U.S. Next, in section 4, I describe the various high-speed rail categories, followed by a description of the specific types of investments needed for HSR. In sections 6 and 7, I turn to analyzing the complex and widely dispersed international HSR supply-chain, and examining the multiproduct nature of the firms in the HSR Industry. The above-mentioned sections set the stage for examining various aspects of investments that the Government may need to make. With this in mind, in section 8 I examine the foreign firms’ capabilities in the U.S., by taking a look at the major global players that have operations in the U.S. and their existing contracts in the U.S. In the next two sections I examine the nature of contracts and partnerships (section 9), including public-private partnerships (section 10), in international HSR markets. The final four sections review some of the studies that shed light on the longer-run dynamic Effects of HSR Investments (section 11), the Buy America requirement for investing in the U.S. (section 12), obtain additional insights from the industry based on questionnaires and survey (section 13), and note some implications for U.S. HSR investments and manufacturing capabilities (section 14). 6 2. U.S. PASSENGER TRAIN HISTORY In this section I briefly discuss the history of US passenger car builders, some of the newer foreign companies that have set up facilities in the US, US locomotive manufacturers, and a quick look at some areas where the US may have competencies in components manufacturing. 2.1 U.S. passenger car builders Historically, the American Car and Foundry Company (ACF) built passenger and freight cars.