Interview with President & CEO/Progress Rail (One of the Bidder in the Madhepura Loco Factory Global Tender)

bio-william-ainsworthElectro-Motive Diesel (EMD), part of the $65-billion capital goods major Caterpillar, is one of the two key American firms competing for a tender to supply diesel locomotives to Indian Railways, the other being GE. William P. Ainsworth, President and CEO of EMD and Progress Rail Services (the Caterpillar-owned subsidiary that acquired EMD in 2010), spoke about the key markets for the company’s business and also its attempts to develop gas-based locomotives on the back of high diesel prices.

Edited excerpts:

What is the value of business that EMD gets from India?

The problem is we are not a separate reporting section within Caterpillar and we don’t reveal the business we do with separate customers.  In India, we have one customer — Indian Railways — so it would be difficult to share numbers.

Which countries provide you business?

North America is our largest market. After that it is India, Australia and Brazil.

Not China?

We do some business in China, but it is not a large market for us. Several years ago, in 2005, we had a large order to provide 300 locomotives to China…But India is a consistent market for us.

Did this China order incorporate a transfer of technology component (as the Chinese tend to always do)?

It had some. Some technology we transferred, some we didn’t.

Was the transfer of technology agreement with China based on the number of locomotives or the number of years?

Good question, but I don’t know the answer to that question. They (EMD) did that part before we (Progress Rail) acquired them.

What is the nature of customers for Progress Rail — primarily state-owned or private owned? Could you give us a break-up?

North America is primarily private. But if you get outside North America, quite a bit is government-owned. Brazil is privatising rail roads, Australia has privatised rail roads. So, I would say it is more private than government. In India, it is government-owned, and so is the case in some other jurisdictions. But it would be difficult to give specific numbers.

You have the railway systems of so many countries as your customers. Which markets are still seeing good growth in orders in the backdrop of the current overall slowdown?

Even though the market is slowing down, worldwide, people are realising that transporting goods and services by rail is the most economical and environment-friendly way to move. Moving freight by rail is two-to-four times more fuel efficient than moving by truck. And when people move by rail they reduce carbon emissions. So, I would say, on a worldwide basis, people are adding more rail infrastructure and a lot of capacity.

Haven’t you seen the incremental capacity addition slowing down in the last five-six years?

Well, it ebbs and flows depending on where you are. Obviously in 2009, everything was depressed. But overall, there is growth in rail movement.

You discussed rail versus road competition. What about intra-rail – the diesel versus electric debate. With diesel prices going up, how will your customers get more value for money?

Caterpillar is our parent company. We are the largest high-horsepower engine manufacturer in the world. At EMD, we have the best engine technology available to our customers. So, for the customers that burn diesel we are making more fuel efficient engines.

But one of the big initiatives we are working on with our customers is in the area of liquefied natural gas (LNG). We have demos at the end of this year in North America. Using gas rather than diesel-based engines offers customers substantial savings on current prices in the US now. Also, we are also discovering more and more gas (globally). We are definitely looking at alternative fuel plans.

Are you referring here to the BNSF project (a railroad where Warren Buffett is an investor)?

I won’t name any customer. We are working with several customers on gas-based technology.

Indian Railways, too, has been talking about biodiesel- and LNG-based locomotives. Are you currently involved in any discussion in these areas?

Biodiesel, yes. We have told Indian Railways that 5 per cent blend is what we would be perfectly fine with. We are also willing to work with the RDSO (Indian Railway’s Research Design and Standards Organisation) on how high we can go with the blend. We are also doing bio-fuel with vegetable oil.

You are already supplying to Brazil, which does a lot of bio-fuel blending. But we have heard that customers who do bio-diesel blending face warranty issues from loco manufacturers…

Bio-diesel is hydroscopic; it absorbs a lot of moisture. So, you have to be careful about how much you blend.

About your business in China. You got the 300 locomotives order in 2005; why hasn’t that moved forward?

Well, we worked with China Northern Locomotive and had a 300loco order that we sold them. They were 6000 HP locomotives. There are other opportunities in China that we are evaluating currently. But we see other markets in rail…(and they are) the ones that we are putting our resources in.

Is it true that one of the firms you supplied to in China is today competing with you in the Indian Railways’ loco tender now?

(With a laugh): You did say that, I did not. All I can say is we are focusing our resources on specific countries that I talked about earlier.

Have you previously executed public private partnership (PPP) contracts of the kind that you are evaluating now in India (the tender floated by the Railways involves setting up a locomotive project at Madhepura in Bihar through a joint venture)?

PPP is a big word. We have done a lot of deals with governments to provide locomotives and sell them maintenance services. We would not comment about the ongoing tender.

Last time, (in 2008-09), the diesel loco tender got cancelled because EMD did not bid for the project, and Indian Railways was left with just one bidder — GE. You are most likely to be short-listed this time. If short-listed, will you bid?

We have to pre-qualify. We have submitted the documents to pre-qualify. And other than that, when the request for qualification is in process, we don’t comment.

But your qualification is almost certain. So, if you qualify, will you bid financially?

Our company policy is to not comment when the process is on.

All I am trying to know is whether you will submit financial bids this time, given the last experience when you pre-qualified but still did not submit a financial bid?

We are not going to comment on that. We are a publicly traded company.

About Progress Rail Services

Progress Rail Services Corporation, a wholly owned subsidiary of Caterpillar Inc. since 2006, is a supplier of railroad and transit system products and services headquartered in Albertville, Alabama, United States. Founded as a recycling company in 1982, Progress Rail has increased the number of its product and service offerings over time to become one of the largest integrated and diversified suppliers of railroad and transit system products and services in North America. Progress Rail markets products and services worldwide and maintains 110 facilities in the United States, 34 in Mexico, four in Canada, two in Brazil, five in UK, one in Italy, and one in Germany. Progress Rail is organized into two divisions: Engineering & Track Services (ETS) and Locomotive & Railcar Services (LRS).

History

Progress Rail Services Corporation traces its roots to a recycling company founded in Albertville, Alabama, United States in 1982.

Progress Rail became a division of Progress Energy in 2000 as a result of the merger of Florida Progress Corporation and Carolina Power & Light Company.

In February 2005, Progress Energy announced it was selling Progress Rail to One Equity Partners for $405 million. The sale closed on March 28, 2005, with Progress Rail becoming a separate private company.

On May 17, 2006, Caterpillar Inc. announced it would purchase Progress Rail from One Equity Partners for $1.0 billion in cash, stock and debt. The acquisition by Caterpillar was announced as part of its long-term strategy, Vision 2020.

In July 2011 the company announced it was to assemble EMD locomotives at a plant leased in the state of Minas Gerais, Brazil.

Acquisitions

On May 24, 2008 Caterpillar agreed to acquire all of the capital stock of MGE – Equipamentos e Serviços Ferroviários Ltda., a São Paulo, Brazil-based locomotive component and transit car services company to become part of Caterpillar’s Progress Rail Services Corporation. The acquisition of MGE marked Progress Rail’s first entry into the South American market.

On June 1, 2010, Caterpillar announced Progress Rail Services Corporation would buy Electro-Motive Diesel, Inc. from Berkshire Partners LLC and Greenbriar Equity Group LLC for US$820 million.  The purchase was completed on August 2, 2010, making Electro-Motive Diesel, Inc. a wholly owned subsidiary of Progress Rail Services Corporation.

During 2010, Progress Rail acquired two makers of signal equipment, Coast to Coast Signal Engineering and C&S Signaling, as well as a General Electric subsidiary involved in the signal industry; now Progress Rail Inspection & Information Systems.

Products (Locomotives)

Progress Rail currently offers four models of locomotives:

PR7B
PR15B
PR22B
PR22L 2013 for Tasmania (1,067 mm (3 ft 6 in) gauge) – 17 off
PR30C
PR43C

Signals

Progress Rail’s Signal Division makes grade crossing and wayside signals under the name Lincoln Industries.

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