Bruised on two fronts with threats to Trains/Planes, Bombardier’s Rail loss is all about Geopolitics

Train-and-plane maker puts on a brave face as European giants Alstom and Siemens marry their rail businesses

Bombardier’s PR whizzes pulled the oldest trick in the book on Tuesday night, when they realized they had to say something, however bland, on the blockbuster merger of Alstom SA of France and the rail division of Germany’s Siemens AG, creating the world’s second-largest train maker. They made a virtue of a necessity.

Bombardier Transportation (BT), the company’s largely European rail business, was in fine shape, merci beaucoup, and was happy to go it alone while industry giants were forming around it. “While we will always explore strategic options that may create value, we do not need to merge with another major player to maintain our leadership position in the rail business,” the company said in a statement.

Never mind that BT, for years, has been trying to do a deal with either Alstom or Siemens while the big Chinese train makers, now merged into a giant called CRRC, opted to make world domination their business strategy.

As late as this week, some key Bombardier investors were convinced that BT and Siemens could surprise the market with a merger proposal, even though the rumours suggested an Alstom-Siemens union was more likely. BT was still thought to be in the running because, in the summer, it was widely reported that BT and Siemens were on the verge of forming two joint ventures, one to pool their rolling-stock manufacturing, the other for their signaling businesses.

Why the joint venture idea was scrapped isn’t known, but here’s a guess: It was more to do with European geopolitics than figuring out whether the offices with the best executive toilets would go to the Canadians or the Germans.

While Europe is outward-looking on trade – note the recent launch of the Canada-Europe free-trade agreement, known as CETA – it is decidedly inward-looking when it comes to building corporate champions. Putting a French and a German company together made patriotic sense; a Canadian and a German one far less so.

The European train business has always had nationalism in its DNA. Almost all of the biggest European countries had their own train-making businesses. Like the auto companies, they helped to revive Europe’s industrial base after the Second World War.

Trains required steel, which required steel mills. They required engineers, which required technical schools. They put a lot of semi-skilled and highly skilled people back to work after the war debris was swept away. Their workers were part of powerful unions.

Their trains became marks of national pride. To this day, the train à grande vitesse (TGV), the super-fast train that was developed in the 1970s by GEC Alsthom (now Alstom), is a high-profile symbol of modern France and its razzle-dazzle transportation technology.

When BT threatened in 2011 to close its Derby factory in England, which was once the world’s biggest train-making site, the British government went into spasms of grief and duly found a fat contract to keep it alive. In the 21st century, trains matter as much as ever – maybe more so – as European governments try to keep their waning tech and industrial sectors from wholesale exodus to Asia.

An outright foreign takeover of the Alstom or Siemens train-making business was always unthinkable. It became even more unthinkable when Emmanuel Macron was elected French President in the spring. More so than Germany’s Angela Merkel or Italy’s Paolo Gentiloni, he is Mr. Europe and is calling for greater integration as he seeks to reinvent the stalled “European project.” Big European companies (read: Not American or Chinese) fit his style.

The rumours that Siemens and BT were on the verge of a joint-venture deal would not have been lost on Mr. Macron and his ministers. The political capital they threw at the union of Alstom and Siemens may have been enough to convince Siemens to ditch the Canadians, though, in truth, putting Siemens and BT together would have been a logistical pain because of the extensive overlap in Germany – whose factories and workers would go to the butcher’s block?

BT is running out of options in Europe, especially since it wants to be a buyer, not a seller; the cash flow and profits from the train side are needed to prop up the ailing aerospace division, so the bigger BT becomes, the better.

Creating a “European” champion, in other words, will be hard as long as Bombardier, through BT, is doing the buying. BT will eventually get its prize – it has to, if it wants to compete on a global scale with the Chinese – but that prize may not be a big European train company. In the meantime, it, with a little help from its PR guys, will pretend not to worry as giants form around it.

Bombardier Inc.’s turnaround plan is coming under threat from stepped-up challenges to the company’s rail business and its cutting-edge jetliner.

The Canadian manufacturer risks being jilted by Germany’s Siemens AG (ETR: SIE), which is now exploring a rail-equipment deal with Alstom SA (EPA: ALO) of France after months of talks with Bombardier. Separately, the U.S. government is set to decide this week whether tariffs should be imposed on Bombardier’s CSeries aircraft after a complaint by Boeing Co. (NYSE: BA).

The developments imperil chief executive officer Alain Bellemare’s two-year-old effort to reshape Bombardier (TSX: BBD.B), which has also relied on financial support from Quebec and Prime Minister Justin Trudeau’s federal government. Losing out on a Siemens deal would weaken Bombardier’s rail unit, its biggest business, against a bulked-up industry leader from China. An adverse trade ruling in the U.S. would hamper demand for its priciest jetliner, the CSeries.

“It would be a loss for Bombardier if Alstom and Siemens come together because this would leave them in the cold,” said Karl Moore, a professor of management strategy at Montreal’s McGill University. “At the same time, you run the risk of the CSeries being shut out of the U.S. market until the issue of duties is settled, which will take some months.”

Bombardier tumbled 6.3 per cent to C$2.22 at the Friday close in Toronto, the biggest decline in more than three months. The widely traded B shares are at the lowest level since May.

Left at the altar

Alstom said Friday it’s in talks with Siemens about a possible combination of their rail businesses, adding that “no final decision has been made.” The confirmation came hours after the French government signaled it supports deeper corporate ties with Germany, suggesting a deal between Levallois-Perret, France-based Alstom and Munich-based Siemens would have political backing.

Bloomberg News reported Thursday that Siemens was negotiating with Alstom as well as Bombardier, giving the German company two options to pursue consolidation. While declining to comment specifically on its competitors, Bombardier said Friday it was weighing “multiple options” for its rail business — repeating a phrase Bellemare has used in the past.

Getting left at the altar “is a new risk” for Montreal-based Bombardier, said David Tyerman, an analyst at Cormark Securities in Toronto. “Bombardier is going to be the guy without a dance partner. If geopolitics come into play, you really don’t have anybody in your corner.”

The rail companies are looking to join forces to compete with industry leader CRRC Corp. of China, which was formed from a 2015 merger of the country’s two main regional train makers. The company controls about half the global market for rail cars and locomotives, Desjardins Capital Markets estimated in a report this year, compared with 12 per cent each for Bombardier and Siemens and about 11 per cent for Alstom.

Aided by its ability to finance entire projects, CRRC has won high-profile rail orders including transit contracts in U.S. cities such as Boston, Philadelphia and Los Angeles. Bombardier missed out on a $3.2-billion contract to provide subway cars in New York and has been plagued by delays on major projects such as streetcar deliveries to Toronto and subway cars for Montreal.

The train business bore the brunt of Bellemare’s plan, announced last October, which included 7,500 job cuts worldwide.

Boeing complaint

While Bombardier’s rail business contends with the uncertain outcome of deal talks, a threat to the jewel of its commercial aircraft business is also coming to a head. The U.S. Commerce Department will issue a preliminary ruling Tuesday on whether to impose countervailing duties on the CSeries, which Bombardier spent at least $6 billion to develop.

In a trade complaint, Boeing accused Bombardier of selling the single-aisle jetliner to Delta Air Lines Inc. (NYSE: DAL) at less than fair value, while benefiting from unfair government subsidies in Canada. Earlier this year, the Canadian government pledged $372.5 million to Bombardier to finance two jet programs including the CSeries. Quebec invested $1 billion in the program last year for a 49.5-per-cent stake.

“The general expectation among the majority of watchers is that the ruling is very likely to go against them,” said Chris Murray, an AltaCorp Capital analyst in Toronto. “Either way, the whole thing could take a while.”

In June, the U.S. International Trade Commission ruled that Boeing’s commercial jet business may have been harmed by Bombardier. In addition to the countervailing duties, Boeing is seeking anti-dumping duties of about 80 per cent. Bombardier says it complies with international trade regulations.

In the meantime, the trade dispute “will be an overhang for some time to come,” said Cam Doerksen, an analyst at National Bank Financial. “Until that’s settled it will be very hard for a U.S. airline to make a firm commitment to buy the plane.”

Sales drought

With the exception of a two-aircraft order from Air Tanzania in December, Bombardier hasn’t booked a major sale of CSeries jets since Delta committed to buying at least 75 of the planes in April 2016. Delta testified in favour of Bombardier at International Trade Commission hearings in May, saying that it never even considered Boeing models before placing its order with the Canadian planemaker.

The sales drought is likely to pressure Bombardier’s efforts to sell more planes outside the U.S. without resorting to aggressive discounting.

“Unfortunately, if there is a negative ruling Tuesday you are not going to sell any more CSeries in the U.S. market for a while,” said Ernie Arvai, a partner at aviation consultant AirInsight. “People will know internationally that you are desperate for orders. They will be expecting good deals.”