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The truth behind the Siemens-Alstom merger

Ex-Deputy Business and Finance Editor, Rizwaan Ahmad, takes a look at the recently blocked merger

Photo Credit: Marco Verch

“It’s going to serve China’s economic and industrial interests.” That is how Bruno Le Maire, French Finance Minister, characterised the EU Commission’s decision to block the proposed merger between Siemens and Alstom. The proposed merger would have created the rail equivalent of Airbus, capturing 15 per cent of global railway revenues. Yet at the heart of Mr Le Maire’s frustration was European, and more broadly, Western insecurity about the looming threat of China and its state-backed corporations. 

CRRC, the Chinese rail behemoth, has global revenues double that of even the proposed merged entity. According to Le Maire’s camp, Europe should not let archaic antitrust rules get in the way of the creation of “European Champions” to compete against the unfair advantages afforded by China to its companies.

Margarethe Vestager, the European Commissioner for Competition, disagreed with the merger, and rightly so. The merger would have a chilling effect on the competitiveness of the European rail market. In particular, Siemens-Alstom would have a near monopoly in the signalling and high-speed train businesses. In the latter, the merged entity would enjoy a 50 percent market share. 

In a market with already high entry barriers, this would be a terrible move for businesses and consumers. In Britain, this is more evident than anywhere. The Office for Rail and Road estimate that the combined entity would capture 75 per cent of Britain’s signalling market, and the reduced competition would drive up the cost of HS2 yet further. A joint open letter from the national competition regulators of the UK, Spain, Belgium and the Netherlands expressed serious concerns about the effect of the deal.

As well as National Regulators, the merger had been strongly opposed by other key players in the market. Hitachi Rail, which has a factory employing 730 people in the North East, argued that China should not be used as an “excuse” for the merger. 

The Commission’s decision was met with smug relief from Bombardier, the Canadian transportation company. A press release remarked that it was “pleased” with the decision. The merger would have left Bombardier a distant third in the global passenger railway market. 

But is the Commission’s decision an act of naivety in the face of the uncompromising threat from China? Prima facie, it would seem that Europe would need the merger and more to compete with CRRC. 

The company, formed in 2015 by the merger of two Chinese rail companies, has a 71 per cent capture of the global market for high speed rail. Even Siemens and Alstom together have a mere 10 per cent. But look beyond this figure, and the picture becomes much less ominous. CRRC has a near monopoly on domestic Chinese high speed rail contracts. 

China has built over 20 000km of high speed rail lines, more than the rest of the world combined, and the construction is set to continue. Only around 9 per cent of CRRC’s global revenues come from its operations outside of China. As Vestager pointed out, the company has yet to even bid for a contract in the European market, let alone become a key player. Ironically enough, the merger could have provided an opportunity for CRRC to enter the market by purchasing the two companies’ divested asset. 

The failed deal comes amidst an atmosphere of unease in the West about China’s growing economic and political heft. China’s Belt and Road initiative, which will see an investment of more than $1 trillion USD in infrastructure across Asia and Africa, has been decried as “debt-trap diplomacy.”

The developing world is seen as falling further into China’s grasp. The Siemens-Alstom deal was more than a regular corporate merger; it was a test case for the resilience of Europe’s institutions in withstanding the political winds of protectionism. For how long Europe will maintain its rule-based order, only time will tell.

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