The EU’s Achilles heel? #Transport infrastructure

| November 23, 2018

In a bid to halt the encroachment of Chinese companies into European markets, the EU is seeking to restrict foreign direct investment (FDI) by implementing a rigorous screening framework designed to identify any substantive threats to the bloc’s critical infrastructure or technologies, with transport one of the most acute ones. The information-exchange system would alert governments to proposed foreign investments in a member country and would offer a mechanism for examining how they might affect an existing European project.

As the EU is exceptionally vulnerable to Chinese encroachments, the nervousness over FDI is justified. It’s a troubling matter of fact that that Europe is lagging behind Beijing in a number of industries, particularly when it comes to transportation. Ironically, it’s a situation exacerbated by the rigid application of EU competition regulations.

Allegations that the system is holding back important developments were first voiced by Angela Merkel and French finance minister Bruno Le Maire in the context of EU concerns over the Siemens-Alstom merger. The deal would create a European train “champion” to resist the Chinese incursion. However, Competition Commissioner Margrethe Vestager will likely derail it over fears that the merger is ‘incompatible’ with the internal market. While the new entity would certainly have the clout to challenge the world’s largest train maker – Beijing-backed CRRC – EU officials believe that the Chinese threat is exaggerated and competition in the sector unlikely in the immediate future.

Considering Brussels’ fears over encroaching Chinese FDI, such attitudes regarding the transport sector are nothing short of absurd. Vesteger’s comment that “The champions we need are the ones that can fight their way to the top of a competitive market in Europe – and go on to do the same across the world” perfectly encapsulates this tragic irony. After all, Vesteger’s demand for globally competitive firms is directly undermined by the EU’s unwillingness to allow large competitive firms to arise in the first place.

It’s easy to dismiss the merger as a Franco-German scheme to dominate the EU’s railway sector. But Merkel and Le Maire have a point: China is ready, willing and able to plug the technology and infrastructure hole that Brussels has been unable to fill.

Because it is integral to Beijing’s Belt and Road Initiative, CRRC enjoys long-term strategic and operational support from its government. That backing has enabled it to capture 46 percent of the global railway market for trains, services and signalling. According to 2016 figures, CRRC is twice the size of its nearest competitor, Canadian group Bombardier, with Alstom and Siemens ranked third and fourth. The company would like exports to account for a fifth of its business by 2021 and has Europe firmly in its sights.

The argument in favour of scaling up the EU response should therefore be gaining ground. For China has upped its game in the quest for greater international engagement: a country that traditionally relied on technology transfer is now operating from a deep indigenous knowledge base and is transitioning from importer to exporter.

Unfortunately, the European industrial base essential for pushing back against China isn’t performing at its peak. The fragmentation of the transport sector across the EU means that few companies have the ability to manage long-term projects efficiently.

French aerospace and transport specialist Thales is a case in point. Although Thales has been unsuccessfully attempting to sell its ticketing division since 2016, the firm was contracted to provide Bordeaux with a contactless ticketing service. Company officials recently admitted the project twenty months behind schedule. Originally due for implementation in summer 2017, it has been dogged by setbacks and is now estimated to launch in March 2019. The delays have notably angered the city’s mayor and former French prime minister Alain Juppé, who called Thales’s inability to meet its commitments “unacceptable behaviour”.

The criticism is the more scathing considering that this regional debacle doesn’t bode well for the company’s $265m transportation contract in Vietnam’s capital city, awarded in 2017. Planned to be operational by 2021, the terms require Thales to deliver a telecommunications system for Hanoi’s metro Line 3. However, progress is already behind schedule due to delays in “dealing and conducting bidding packages”, as well as other issues.

Unfortunately, Thales isn’t the only such case. Spanish conglomerate Acciona has already demonstrated its inability to adhere to contractual terms in international projects. In charge of Sydney’s light rail project, repeated delays and cost overruns have caused lots of farcical discord between company representatives and local government officials over failing to disclose information crucial to the project’s success.

The disputes have turned into political crisis for the Sydney government marked by official inquiries into Acciona’s conduct and Acciona suing in response, alleging govenrment misconduct in handling the project – all the while the firm itself is under pressure for seemingly failing to provide sufficient oversight on the ground.

If big players like Thales and Acciona have such difficulties getting their projects off the ground, their ability to successfully complete future demanding international contracts is reasonably called into question – which in turn highlights the lack of global credibility of European infrastructure and tech providers.

It’s no wonder then that the EU’s common transport policy is only making stuttering advances. It prioritises issues pertaining de-carbonization rather than pressing infrastructure and industrial base improvements. By trying to satisfy the parameters of an ever-shifting sustainability model, the transport sector hasn’t had the resources to bolster a skill base fit for the future.

The lesson for the EU is simple: widespread advances pivotal for the future of the bloc’s transport sector can only be realised if a big player is allowed to scale up and develop pioneering technology and greater efficiencies, thereby remaining competitive in the face of growing Chinese pressures. Besides strengthening FDI controls, Brussels urgently needs to adapt its industrial policy to help home-grown companies stay relevant in a rapidly changing international market. If Europe’s competition rules don’t allow European champions to emerge, it’s clearly time to take for a rethink.

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