BY ALEX BINKLEY
Having built a strong base supplying two transcontinental carriers and countless smaller operators, the Canadian railway supply industry wants to gain attention for its products overseas where interest in expanding railways is strong.
The Canadian Association of Railway Suppliers (CARS) recently brought 15 railway officials from Eastern African countries such as Kenya, Ethiopia, Tanzania and Uganda to Canada to demonstrate the range of rolling stock, equipment and services that Canadian companies offer, says Bill Thompson, CARS Vice-President and Regional Sales Manager for Rail Timken Canada. “Together these countries represent a large market,” he said. “They are interested in both freight and passenger equipment. However, they operate on different gauges of track and have specific needs.” Officials from Tanzania were here back in May as well. The trip was supported by the Department of Foreign Affairs and International Trade, he noted. “We work closely with government agencies to keep track of the needs of other countries.”
CARS has existed in various forms for decades and formally incorporated in 1991. While the industry has some well-known players such as Bombardier and National Steel Car of Hamilton, there are
124 members that supply products and services to freight, passenger and urban transit operators domestically and abroad. While national in scope, many companies are located in Ontario, Quebec and Alberta. Locomotive and freight car components and track equipment are the leading products.
Thompson said the success of the Canadian railways and the innovative quality of Canadian products gives the industry a favourable status among international buyers. But it faces stiff competition from Europe and Asian countries such as China and Japan in the supply business. “It’s a tough battle and the supply companies are working together to promote the industry.”
Thompson said CARS aims to position its members to win sales to domestic and international railways. “We help the membership maximize their business opportunities by opening doors in the industry and at the government level. The Association serves as a conduit to ensure that up-to-date information on contracts and procurements, timely news items and events are available that would be of benefit to both the members and the industry as a whole.”
CARS brought the African delegation to Canada with the help of funding provided through the federal Global Opportunities for Associations program. It allows groups to reimburse members for up to 50 per cent of their expenses when attending events that will help Canadian suppliers to export. Next year, CARS plans to apply for funding to assist members to participate in a Canadian Pavilion at Innotrans in Berlin.
The tentative Canada-Europe free-trade deal is of great interest for the supply companies because it could find their products more competitive in Europe as tariffs are removed, he said. CARS supports the idea of free trade with Europe although the impact will vary among the member companies. The Association will work to keep its members fully informed of the details of the agreement, which is still being finalized.
The industry knows that free trade is no guarantee that trade barriers will completely disappear, he added. Despite the North American Free Trade Agreement, CARS members have been blocked from supplying U.S. passenger and transit companies through applications of the Buy American Act. They have knocked Canadian companies out of the running for contracts unless they set up operations in the United States, which siphons jobs out of Canada.
Small and medium sized companies have been impacted the most by the Buy American provisions because they can’t afford to set up facilities south of the border, Thompson says. Right now it looks like a trans-Pacific trade agreement that prevents programs such as Buy American is the best hope for ending the discrimination against Canadian products, Thompson added. “We have to get our members to understand these issues and the need to keep pushing the government for progress in the negotiations.” In the meantime, CARS is hoping for changes some of the requirements for subassembly systems and components that could mitigate the impact of the Buy American Act.
CARS is also working to convince the federal government to adopt more realistic capital depreciation rules for railway equipment, Thompson noted. “That’s a big issue for us.” The Association has worked on the issue for years and despite a favourable recommendation from the Commons finance committee several years ago, the depreciation rules leave Canada at a competitive disadvantage compared to the United States.
CARS has enlisted Canadian Manufacturers and Exporters (CME) to assist in securing depreciation changes. It takes 17 years, almost the half the service life of a freight car, before it can be fully depreciated. Changing that and a better first year write down would “encourage leasing companies to operate their newest cars in Canada and for the railways to renew their fleets providing the manufacturing and component sector with a much needed boost. It would also spur innovation and development of new materials and systems for freight cars enhancing safety, reliability, and productivity.”
The makeup of the supply industry shows the diverse nature of the business. Its service sector has been dominated by engineering and consulting and that is expected to grow in the future “as railways remain focused on their core transportation activities,” Thompson says. At the same, “two-thirds of our rail supplier firms still provide products. This speaks to both the historical and traditional nature of our industry, and also to the capital-intensive nature of railroading.” The companies have aggregate domestic sales of $4 billion per year. Eighty per cent of suppliers are also active in export markets, and these activities bring in another $5 billion. The fact that suppliers outnumber buyers by a wide margin means the supply companies have “to be innovative and efficient. Ultimately this is reflected in our strong reputation in this field around the world for top quality products and services. “
Rail is a capital intensive industry and manufacturers depend on consistently large annual capital investments by railways. In Canada, CN and CP will spend close to $3 billion in capital expenditures for 2013, and are expected to continue major upgrades to their networks in 2014. VIA Rail and the commuter train and transit operators in Vancouver, Toronto and Montreal have also been making major capital expenditures.
One of the most important factors influencing the Canadian rail industry’s future is facilitated access to additional markets to drive economies of scale in both production and development activities. “Because Canada’s market is generally too small to meet these requirements, the industry has to rely on international projects to achieve the required critical mass,” he notes. “To successfully bid on large projects in export markets, Canadian companies continue to develop and maintain a combination of system design capabilities, technological expertise, competitive prices and financial strength.
“With our relatively high Canadian dollar and labour costs, the majority of firms are involved with a combination of domestic and imported input materials,” he continues. “Over the years, Canadian suppliers have had to become flexible, technology-driven, and cost-conscious manufacturers to remain in the game. Consequently, this has given us an advantage internationally. The majority of Canadian suppliers sell primarily to other manufacturers followed closely by direct sales to railways, transit operators and foreign governments. Steady, and in many cases growing demand is foreseen as the North American railway industry continues to play a major role in providing transportation in a globalizing trading environment.”