How did China become a strong competitor in the high-speed rail industry?

Big bucks, hostility to Japan and a well adapted Game Theory strategy.

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First, a little bit of background:

China has long wanted to upgrade its massive rail network to the standards of Japan and France. From day one, the leadership knew this was going to be a big cake for whoever wins the bid, as the scale of the potential High Speed Railway (HSR) coverage is unheard of in this industry. 

The rule of engagement is set out very clearly from the beginning: any firm wished to bid in this mammoth project must transfer their technology to Chinese domestic partners. 

Although it may sound like shooting oneself in foot by transferring cutting edge technology to a developing country with huge industrial capacity, the accountants soon worked out that even if a firm transfer all of its technology, the profit from the project will still more than offset the cost of R&D for the next generation of HSRs (this idea was heralded by Bombardier who started transferring technologies since as early as 1998). 

The Big Bucks:


In 2010 alone, the Ministry of Railway (MOR) invested over US$100 billion in new construction. The next year, in 2011, another US$100 billion is invested. If compared with military expenditure, this places MOR as No.3 in the world, behind USA and China and ahead of Russia (US$87 billion in 2013). 

With this much cash on the table, the project has become a modern day gold rush for the likes of Siemens, Alstom, Bombardier and Kawasaki.

Hatred of Japan:


Initially, Shinkansen train sets (Kawasaki) was going to be awarded to supply the entire project. Once made public, the decision was overturned by angry nationalists who gathered over a million signatories against the deal based on Japan's unresolved WWII atrocities. 

As a result, the bidding process re-opened to start favoring European and North American companies. The structure of bidding also changed - it has decided that instead of a winner-takes-all scenario, all participants are going to have a slice of the cake which lowered the risk as well as maximized technology transfer benefit to domestic train makers.

To the Chinese train makers, instead of obtaining one type of technology from Japanese train maker, they now have access to all types of HSR technologies thanks to the re-structure. 

Game Theory:


The foreign bidders were played off against one another in a text book Prisoner's Dilemma: holding out on technology transfer or refusing to lower prices will yield maximum profit but risks missing out entirely on the bidding. If all Chinese requirements are met, however, the profit margin will hurt greatly as well as facing risk of losing one's market leader position by nurturing Chinese competitors from end to end. 

The high octane game ended surprisingly well to the Chinese - the final contracts are not only similar in structure with the aim to offer maximum assistance to domestic partners in digesting and maturing foreign technologies (e.g. from the 60 train set orders Kawasai won, three would be built in Japan, six kit sets would be assembled in China and the remaining 51 would be made and assembled in China), but also set a new low cost benchmark for the HSR industry.

Siemens was the only one who decided to stood its ground - but not for long. Due to its high asking price, it was the only train maker not awarded any contract in 2004. The following year, Siemens reshuffled the bidding team and lowered its price to win a 60 train set order in the 350km/h category. 

As a group, the major train companies 'lost out' on maintaining their competitive advantage by failing to squeeze out maximum profits to maintain their lead for the next-gen HSR to fend off the inevitable assault from the very competitors they helped raised. 

Conclusion: 

China has significantly reduced its partnership with western train makers in the on-going HSR expansions. The reliability and speed of domestic trains have steadily improved to a satisfactory level, often exceeding the specs of the original train sets designed by western train makers. Although China's overseas HSR bids have yielded mixed results so far, it has leaped over hurdles that would otherwise take decades to overcome. 

One can say that China bought its way to become a serious contender in the HSR industry. Even with a deep pocket, this is still easily said than done without an uncompromising goal and a highly efficient governing structure.