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Don’t Trust China to Make Our Subway Cars


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Bryam Gruley, Bloomberg  /  October 4, 2019

The concrete floors shine in the new $100 million factory on Chicago’s far South Side. Towering shelves painted in blue, yellow, and red are mostly empty. The quiet is eerie, punctuated only by a forklift’s occasional beep.

On a bank of 6-foot-high platforms rest the steel shells of five 48-foot-long passenger rail cars destined for the Chicago Transit Authority. Inside the cars, small clutches of workers trace multicolored bundles of wire. Outside, others in safety helmets and glasses attach HVAC equipment to the undercarriages. All work for the Chicago subsidiary of China Railway Rolling Stock Corp [中国中车股份有限公司]. And what they’re doing scares the hell out of some U.S. manufacturers and Washington politicians.

CRRC is the world’s largest maker of freight and passenger rail cars. Over the past decade, the state-owned Chinese company has gone from country to country underbidding rivals and taking business from giants such as Alstom, Bombardier, Siemens, and Hyundai’s rail unit, Rotem. When Siemens and Alstom tried to merge two years ago, before being blocked by European Union regulators, they cited the CRRC juggernaut as one rationale. The Chinese company effectively wiped out Australia’s homegrown rail car industry in less than a decade. Early in 2018, CRRC declared in a since-deleted tweet, “So far, 83% of all rail products in the world are operated by #CRRC or are CRRC ones. How long will it take for us conquering the remaining 17%?”

Since 2014, CRRC has won $2.6 billion in contracts to supply subway cars to transit authorities in Boston, Chicago, Los Angeles, and Philadelphia. The Chicago factory and another in Springfield, Mass., along with a parts-making facility in Los Angeles, collectively employ about 365—including more than 150 union members earning as much as $32 an hour—and plan to add dozens more. In Chicago, production manager Brian Vasquez strolls the floor pointing out empty areas where his facility intends to expand into, among other things, double-decker commuter cars. “It kind of looks like overkill,” Vasquez says, “but CRRC is preparing for the future.”

That future is uncertain, in no small measure because of the dysfunctional relationship between the U.S. and China. This is how fraught things are: In a Congress where it’s almost impossible to get anything significant done, four U.S. companies in the freight car business have persuaded the House and Senate to pass legislation that would withhold federal funds for any municipal project using CRRC cars.

CRRC’s antagonists echo the Trump administration’s harangues against Huawei Technologies Co. and ZTE Corp. They argue that CRRC will use its advantages as a subsidized company to dominate not only the U.S. passenger rail industry but also, eventually, the larger freight car business. They say, too, that China will use CRRC rail cars for espionage, an economic and military security concern. Lawmakers from both parties have embraced these arguments, though there’s clearer evidence for the former than the latter.

In either case, if you’d like Washington to help you kneecap a Chinese rival, now is a good time. FBI Director Christopher Wray told a congressional hearing in July that “there is no country that poses a more severe counterintelligence threat to this country right now than China,” accusing it of trying “to steal their way up the economic ladder at our expense.”

Lobbyist Erik Olson of the Rail Security Alliance, which represents the four domestic freight car companies, says it’s perilous to give CRRC any benefit of the doubt. “You can’t mitigate against the threat,” Olson says. “You have to choose risk avoidance: Don’t buy the train in the first place.”

On a sunny March day in 2017, then-Mayor Rahm Emanuel plunged a shiny silver shovel into a mound of dirt 20 miles south of downtown Chicago. He, along with a few other local politicians and CRRC officials, was breaking ground for the factory. It was going up in the blue-collar Hegewisch neighborhood on a 45-acre site near a Ford Motor Co. plant, a United Auto Workers hall, and a couple of beer-and-shot joints.

The project promised the community 170 jobs and the renewal of an industry that had disappeared when the last rail car shop closed in the early 1980s. “Four years from now, Chicagoans like myself will be commuting on a rail car made in Chicago by Chicagoans,” Emanuel said. That the plant would be built by a company based in Beijing didn’t seem to matter.

No U.S. companies make passenger rail cars. That’s partly because Americans don’t travel on trains nearly as much as they do in automobiles. Most of the companies that make passenger rail cars for the U.S. hail from countries where personal train travel is more common: Alstom (France), Hyundai Rotem (South Korea), Kawasaki (Japan), and Siemens (Germany).

And CRRC. The company dates to 1881, when Xugezhuang Machinery Works built China’s first steam locomotive, nicknamed “Rocket of China.” Today, CRRC is effectively a subsidiary of the People’s Republic, with more than 180,000 employees working at more than 40 subsidiaries around the world. The current version of the company was formed by the merger of two huge makers of rail gear in 2015, the same year the national government issued its Made in China 2025 policy. That initiative listed 10 industries in which China seeks to become a global power. No. 5 is advanced rail equipment. China has tried to mute its ambitious tone as the trade war has heated up, but a recent report from the Berlin-based Mercator Institute for China Studies said the country “has not at all abandoned its economic—and strategic—goal of catching up with Western industrialized countries and gaining a competitive edge in high-tech and emerging technologies.”

CRRC posted a profit of $1.5 billion last year on revenue of $33.1 billion. It landed its first U.S. contract in Boston five years ago and secured orders to build rail cars for Chicago and Los Angeles not long after. In Boston, its $567 million bid to supply 284 subway cars beat out the closest rival, Hyundai Rotem Co. Ltd., by $150 million. In Chicago, its $1.3 billion bid for 846 cars was $226 million less than the offer from Canada’s Bombardier Inc. Dave Smolensky, a spokesman for CRRC’s plant in Chicago, says Bombardier originally bid lower in a previous round in which CRRC didn’t participate, then raised its bid after a competitor dropped out. Bombardier “thought they were going to be the sole bidder,” he says. “It’s a perfect example of what happens when you lose competition.” A Bombardier spokeswoman calls this a misrepresentation, saying the requirements changed for the second bid. “We submitted a highly competitive proposal designed to win.”

CRRC’s critics say the Chicago contract was the almost inevitable result of a state-owned company undercutting rivals with financial help from back home and dangling baubles like new factories before local politicians. According to the U.S.-China Economic Security and Review Commission, created by Congress in 2000, CRRC received $194 million in subsidies in 2014 and an additional $268.7 million the next year. However, a recent study by the Congressional Research Service concluded that allegations of unfair undercutting have “not been proven,” given that the company failed to win contracts in Atlanta and New York City.

It wasn’t CRRC’s initial success making U.S. passenger cars that provoked the company’s antagonists, but a flop in freight cars. The freight business is decidedly different than its passenger cousin. For one, it’s a viable domestic industry—consulting firm Oxford Economics estimates that it accounts for about $5 billion in annual revenue and 65,000 U.S. jobs. While passenger cars, with their interior seating, air conditioning, and other comfort features, can cost more than $1 million apiece, a freight car rarely costs more than $150,000. But freight is a more consistent business over time, because while it’s linked to broad economic cycles, it relies less on customers’ episodic decisions to upgrade their fleets. Municipalities that use federal funds to buy rail cars must also follow “Buy American” laws dating to the Great Depression that require manufacturers to use minimum levels of parts from U.S.-based suppliers. No such rules apply to freight.

CRRC’s freight car ambitions in the U.S. first became evident in 2014, when it joined with a Wilmington, N.C., rail technology company called Vertex and a Chinese private equity firm to form Vertex Railcar Corp. Vertex was to build a variety of freight rail cars in Wilmington, creating more than 1,000 jobs. The company apparently sold some cars, but legal and other troubles forced it out of business in 2018. CRRC’s involvement nevertheless caught the attention of Amsted Rail Co., a Chicago-based maker of axles, brakes, wheels, and other freight car parts.

Olson, of the Rail Security Alliance, says Amsted was concerned about CRRC partly because Chinese state-owned enterprises tend to rely heavily on Chinese suppliers. Amsted had noticed with alarm that after CRRC’s two predecessor companies entered the Australian rail car industry in 2016, they took over. The largest Australian rail car maker, Bradken Pty Ltd., had 40% of the market in 2008; by 2017, it had exited the freight and passenger markets and CRRC claimed virtually all of both. Amsted sought help from Olson, a former congressional staffer who had joined Venn Strategies, a Washington lobbying firm.

In May 2016, Olson helped form the Rail Security Alliance with Amsted and three other U.S. rail equipment makers: American Railcar Industries, Greenbrier Companies, and Trinity Industries. That’s not an especially large lobbying force, but it quickly proved effective. By September more than 50 congressional Republicans and Democrats had signed letters to the Committee on Foreign Investment in the U.S., or Cfius, urging it to review CRRC’s role in the Vertex joint venture. The lawmakers argued that the Chinese company was likely to shift purchasing to China, leaving Americans with nothing more than assembly work. They also raised concerns about cybersecurity.

Cfius never acted on Vertex. But the U.S. suppliers started lobbying for legislation that would ban municipalities from accepting federal funding for contracts with CRRC. Key congressional supporters included Texas Senator John Cornyn, a Republican, and others with rail interests in their states or districts. Last year the ban on federal money made it into a government funding bill but was stripped out before the legislation reached President Trump’s desk. The companies have continued pushing for the ban, amplifying concerns that CRRC trains pose a cybersecurity threat.

The ground in Washington was fertile for such talk. As the Rail Security Alliance cranked up its spy-train campaign, the Pentagon was banning the sale of Huawei and ZTE phones on U.S. military bases, and the Army was stripping its bases of surveillance cameras made by Chinese state-owned Hangzhou Hikvision Digital Technology Co. China’s government was denying reports that it had bugged the headquarters it built in Ethiopia for the 55-nation African Union. On Capitol Hill, the alliance circulated a glossy 15-page pamphlet, authored by retired U.S. Army Brigadier General John Adams, highlighting potential economic and cybersecurity threats posed by CRRC. It raised the possibilities of China secretly monitoring military rail movements and facilitating toxic chemical spills. “I know they have the capability because we have the capability. We just don’t do it,” Adams says. “And I do believe, based on their behavior, that they have the intent.”

It was in this atmosphere that CRRC emerged in late 2018 as a possible bidder on a contract to supply rail cars to the Washington, D.C., subway system. Security hawks immediately started floating the prospect of China using secretly implanted devices to watch and listen to policymakers as they rode the rails near the Pentagon and Capitol. Congressional hearings followed. The legislation that fell short last year started moving again, and the Rail Security Alliance picked up support from the Alliance for American Manufacturing, the Railway Supply Institute, and other advocacy groups.

There have been no reports of CRRC trains being used to snoop. “It’s a conspiracy theory right up there with Bigfoot,” says Smolensky, the company spokesman in Chicago. “Once a rail car is delivered to the transit authority, they have full operational control. The manufacturer does not have access to the rail car.” Robert Puentes, chief executive officer of the nonprofit Eno Center for Transportation, says transit authorities carry out regular quality inspections and it’s “ludicrous” to think a manufacturer could sneak surveillance devices into trains. “If the federal government really wanted to be helpful,” he says, “instead of blocking CRRC, they could give people more money to do better inspections.”

It’s not always that simple. The inspector general of Washington’s transit authority found that third-party contractors and vendors could unwittingly make the subway system vulnerable to cyberattacks. In theory, as CRRC helps to maintain the cars it built, the company could create backdoors for intrusion via software updates. Those “could be turned on and off as needed,” Adams says.

CRRC’s adversaries have seized on a federal indictment charging a Chinese software engineer at an unnamed Chicago locomotive manufacturer with stealing proprietary information and taking it to China. Although CRRC wasn’t implicated, the alleged theft “makes clear that the U.S. rail market is also becoming a target” of China, says a recent report by consulting firm Veretus Group.

Freight cars pose a somewhat different vulnerability than passenger ones because they ferry economically valuable items such as lumber and oil, and also because they’re crucial to military mobilizations. “Rail networks are particularly at risk because they are extensive, dispersed, and complex,” says a recent report by management consulting firm Oliver Wyman. The industry is rolling out a nationwide web of Wi-Fi, GPS, and other technologies designed to smooth scheduling and prevent crashes; that, too, could be a target for bad actors, the report says.

“So much of the conversation about China is what we think they might be up to but so far have no evidence for,” says Bruce Dickson, a political science professor at George Washington University. “You either are suspicious that they might do something and deprive yourself of a high-quality, low-cost rail car, or you can say there’s no evidence and then look like a dupe.”

John Scavotto Jr., business manager of Sheet Metal Workers Local 63, which represents some workers at CRRC’s Springfield plant, 90 miles west of Boston, says it’s frustrating that CRRC hasn’t gotten more credit for paying Americans good union wages. “Before this plant was here, this was a big, empty lot,” he says. “CRRC is offering Springfield a lifeline. It’s a place where you know you’re going to go every day and walk out in 20 years with a pension. There’s security.”

Scavotto says he gets “wound up” at talk of CRRC building spy trains, because his members worry it could cost them their jobs. “Are we really saying to ourselves that the Chinese are smarter than us?” he says. “If it isn’t CRRC, who’s it gonna be? There is no American rail car manufacturer. We let the Germans come in here, South Korea, France—they’re all foreigners.”

CRRC’s critics say the Chicago and Springfield factories employ far fewer workers than would be required to manufacture entire rail cars—hence the relative quiet in the two facilities. The company ships prefabricated train shells to the U.S., where workers fit them out with necessary equipment. Officials at the Chicago and Springfield plants say they satisfy Buy American rules, which require 70% U.S. content. The recent Congressional Research Service study concurs.

“Do we have an advantage in building shells in China? Absolutely,” says Springfield facility director Vince Conti, a 30-year rail car industry veteran who previously worked for Bombardier in China and India and elsewhere. “It feels like we’re being targeted because we’re a Chinese company.”

Well, yes. The question is whether the concerns surrounding CRRC are legitimate. The Rail Security Alliance has spent $2 million on lobbying, most of it going to Olson’s firm, Venn Strategies, according to OpenSecrets.org. The two U.S. CRRC factories, which have retained lobbyists only in the past year or so, have spent at least $160,000. The Massachusetts factory recently launched a website that seeks to counter anti-CRRC claims, boasting that the plant uses parts sourced from New Jersey, South Carolina, Wisconsin, and other states. The site also links to Wall Street Journal and Boston Globe editorials casting trains as no more of a spying threat than ubiquitous Chinese-made smartphones.

None of this is likely to stave off the legislation, which this time is part of a defense spending bill. Assuming that it becomes law, CRRC would be allowed to fulfill its current contracts, all of which involve federal funds except the one with Boston. Any transit authorities that sign a contract with CRRC in the future would have to do without federal dollars.

That could change the calculations considerably. CRRC’s spokeswoman in Springfield, Lydia Rivera, says the legislation would eventually force the factory to close. Smolensky, the spokesman in Chicago, won’t go that far. He says CRRC will continue to educate policymakers about the “unintended consequences” of the legislation: lost jobs and higher prices for rail cars.

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China single handedly shut down CFAC (Columbia Fall Aluminum Plant) by giving their own aluminum smelters free electricity so they could under bid everyone else. I don’t understand who could be against our president trying to level the playing field with other countries when they do things like this. That last line isn’t a right or left argument just a simple right or wrong in my viewpoint. Why should we subsidize everyone else’s well being while ignoring our own?

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The problems we face today exist because the people who work for a living are outnumbered by the people who vote for a living.

The government can only "give" someone what they first take from another.

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